\'  -* 


THE  LIBRARY 

OF 

THE  UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 


This  book  is  DUE  on  the  last  date  stamped  below 


AN  APPROACH 
TO  BUSINESS  PROBLEMS 


BY 
ARCH  WILKINSON  SHAW,  A.M. 

LECTURER  ON  BUSINESS  POLICY 
IN  HARVARD  UNIVERSITY 

EDITOR  OF  "SYSTEM" 


CAMBRIDGE 
HARVARD  UNIVERSITY  PRESS 

LONDON:  HUMPHREY  MILFORD 

OxFOBD  Univebsitt  Press 

1920 


7  :->  1  7  8 


COPTRIGHT,  1916 

BT 

A.  W.  SHAW 


1st  impression  of  1000  copies,  Sept.,  1916 
2d  impression  of  1500  copies,  Jan.,  1917 
3d  impression  of  1000  copies,  Jan.,  1917 
4th  impression  of  2000  copies,  Sept.,  1918 
5th  impression  of  1000  copies.  May,  1920 
6th  impression  of  2000  copies,  Dec,  1920 


535  \ 
i  PREFACE 

13EF0RE  a  science  of  business  can  take  shape,  there 
'-^  must  first  be  built  up  a  system  of  business  prac- 
tice.   The  methods,  plans,  and  rules  of  the  most  effi- 
cient organizations  must  be  brought  together,  tested, 
and  compared,  and  the  most  effective  must  be  selected 
c^  and  coordinated.    Some  of  this  work  has  been  done. 
^  Trade  associations,  universities,  periodicals,  and  various 
■^^^ governmental  agencies  have  been  studying  the  details 
of  production  and  distribution. 

But  up  to  the  present,  no  plan  for  the  guidance  of 
,  \  the  student  in  the  maze  of  business  practice  has  been 
r^  offered.  To  supply  this  deficiency,  to  discover  a  classi- 
fication molded  on  the  living  activities  of  business,  to 
supply  a  uniform  method  of  approach  to  business  prob- 
lems in  whatever  form  they  may  arise,  and  to  illustrate 
the  application  of  this  method  to  typical  problems,  in- 
cluding those  involving  the  relations  of  business  to 
society  —  these  are  the  purposes  of  this  book.  I  need 
hardly  say  that  in  all  this  the  book  makes  no  claim  to 
finality.  If  the  classification  and  the  uniform  method 
should  do  no  more  than  suggest  improvements  upon 
themselves,  the  work,  I  feel,  would  have  been  worth 
while.  But  I  venture  to  hope  also  that  they  will  be  of 
some  practical  value  in  their  present  form:  that  they 
will  make  it  easier  for  business  men  and  all  thinking 
men  to  see  each  activity  of  business  in  its  relations  to 
others  and  to  visualize  and  weigh  all  the  significant 
factors  bearing  on  any  business  problem. 


PREFACE 

The  book  is  a  development  and  rearrangement  of  ma- 
terials used  in  a  course  of  lectures  begun  by  the  writer 
six  years  ago  in  the  Graduate  School  of  Business  Ad- 
ministration at  Harvard  University.  It  would  be  diffi- 
cult to  list  all  the  individuals  to  whom  I  am  indebted 
for  help  with  the  lectures  and  the  book  —  colleagues  at 
Harvard,  members  of  the  staffs  of  the  magazines  System 
and  Factory,  and  scores  of  business  men  with  whom  I 
have  debated  the  problems  and  policies  here  discussed. 
In  reorganizing  and  elaborating  the  lectures  and  in  pre- 
paring the  present  text,  I  have  been  aided  particularly 
by  Mr.  Daniel  V.  Casey,  Dr.  Selden  O.  Martin,  Mr.  R. 
E.  Coulson,  Prof.  Homer  B.  Vanderblue,  and  Mr.  F.  M. 
Feiker.  I  can  conceive  no  form  of  acknowledgment, 
however,  which  would  properly  express  my  obligation 
to  Dean  Edwin  Francis  Gay  of  the  Graduate  School  of 
Business  Administration  at  Harvard.  Without  his  in- 
spiration and  help,  neither  the  lectures  nor  the  book 
could  have  the  forms  they  have  taken. 

What  have  been  the  materials  on  which  we  have  had 
to  draw  for  the  lectures  and  the  book  ?  To  begin  with, 
there  were  the  rules  and  guiding  policies  of  practical 
business  men  —  the  accumulated  knowledge  of  years  of 
experience  and  observation.  No  man  ever  reaches  a 
position  of  power  and  responsibility  without  formulat- 
ing certain  general  truths  which  he  believes  fundamen- 
tal in  the  conduct  of  his  enterprise.  Let  a  new  situation 
come  up,  a  fresh  problem  present  itself,  and  he  can 
usually  marshal  this  fund  of  information  to  an  effective 
settlement.  Yet  ordinarily  he  can  contribute  little  that 
is  positive  and  general  in  application,  outside  his  own 
factory,  office,  or  store.  Men  of  larger  mold,  to  be  sure, 
have  viewed  things  nearer  their  real  proportions  and 

iv 


PREFACE 

have  enunciated  rules  of  action  more  broadly  true  and 
applicable.  But  many  of  these  precepts  even,  like  that 
of  Marshall  Field,  "  The  customer  is  always  right," 
must  be  accepted  with  reservations,  although  they  have 
profoundly  influenced  merchandising  ideals. 

So  with  many  business  proverbs  and  maxims.  One 
frequently  hears,  for  example,  that  "  Goods  well  bought 
are  half  sold."  Yet  this  is  misleading  unless  good  buy- 
ing comprehends  a  knowledge  of  all  the  complex  con- 
ditions which  govern  the  market.  Cheapness  alone  is 
not  a  final  test  of  good  buying,  for  the  loss  from  over- 
stocking in  order  to  secure  price  concessions  may  more 
than  counterbalance  a  price  advantage.  Applying  the 
proverb  in  a  mere  mechanical  way,  therefore,  might 
bring  loss,  if  not  disaster. 

Of  broader  usefulness  for  our  purpose  have  been  the 
generalizations  contributed  by  economic  theory,  which, 
as  one  of  their  greatest  services,  give  a  sense  of  direc- 
tion to  business  thought.  The  important  law  of  dimin- 
ishing returns,  for  example,  declares  that  beyond  a 
certain  fixed  point  increased  expenditure  secures  less 
than  a  proportional  increase  in  product.  Cultivating 
a  market,  that  is  to  say,  is  much  like  cultivating  a  field. 
Two  "  doses  "  of  capital  and  labor  may  not  bring  twice 
the  returns  of  a  single  adequate  "dose";  there  is  a 
point  at  which  the  rate  of  return  falls  behind  the  rate  of 
increase  in  expense.  Applying  this  principle  to  the  field 
of  business,  we  find,  for  instance,  that  the  larger  the 
number  of  salesmen  in  a  given  territory,  the  larger  or- 
dinarily will  be  the  total  number  of  orders.  At  some 
points,  however,  the  orders  per  salesman  fall,  although 
the  expense  per  salesman  holds  relatively  constant.  In 
time,  the  point  is  reached  where  the  return  falls  below 


PREFACE 

the  point  of  profitable  expenditure.  Other  such  gen- 
eralizations have  been  drawn  upon,  and  still  others 
proposed,  in  the  body  of  the  book. 

But,  after  all,  it  is  by  observing  the  complex  and 
multiform  activities  of  business  itself  that  we  can  best 
discover  and  verify  the  reactions  and  relations  of  all 
these  activities,  and  check  and  organize  the  knowledge 
we  already  possess. 


VI 


CONTENTS 


INTRODUCTION 

CHAPTER  I 
The  AcTi^aTiES  of  Business      1 

Every  activity  of  business  represents  the  application  of  motion  to  ma- 
terials. WTien  we  inquire  the  purpose  of  each  motion,  we  find  it  identifying 
itself  with  one  or  three  groups  of  activities,  production,  distribution,  or  ad- 
ministration. The  classification  as  an  aid  to  finding  useless  motions,  that 
they  may  be  eliminated,  and  determining  others  that  may  be  usefully  added. 
Because  production  is  concerned  more  with  tangible  factors  and  is  better  un- 
derstood and  systematized  than  either  distribution  or  administration,  this 
book  will  develop  and  demonstrate  a  systematic  approach  to  problems  in  the 
first  group  and  then  apply  it  to  those  in  the  last  two.  Operating  through  all 
departments  of  any  business,  however,  will  be  found  the  fundamental  prin- 
ciples of  interdependence  and  balance,  giving  rise  to  the  manager's  need  of  a 
strategic  position  overlooking  and  controlling  all  departments  but  free  from 
routine  concern  with  the  details  of  any.  Not  only  larger  profit  but  also  a 
larger  measure  of  individual  and  social  freedom  the  reasonable  effect  of  the 
observance  of  these  and  other  principles. 

CHAPTER  II 

A  Method  of  Approach  to  Business  Problems    .    .   13 

The  activities  of  production  divide  according  to  their  purpose  into  plant 
and  operating  activities,  the  former  concerned  respectively  with  location, 
construction,  and  equipment  of  the  plant,  and  the  latter  with  materials, 
agencies,  and  the  organization  of  factory  processes.  In  administration  and 
in  each  of  the  two  larger  divisions  of  distribution,  namely,  demand  creation 
and  physical  supply,  corresponding  sub-groups  of  activities  are  found.  This, 
then,  is  a  detail  outline,  a  diagram,  if  you  please,  of  business  activities,  at 
every  point  of  which  practical  problems  arise.  Qualities  of  thought  which 
help  or  hinder  in  the  solution  of  these  problems.  Distinctive  success  largely 
a  matter  of  small  advantages  consistently  cultivated  and  conserved.  The 
principle  of  cumulative  differentials.  The  four  steps  in  the  systematic  ap- 
proach to  business  problems:  (1)  elimination  —  or  at  least  recognition  —  of 
the  personal  factor;  (2)  separation  of  the  problem  into  its  constituent  prob- 
lems; (3)  listing  the  factors;  and  (4)  taking  a  fresh  point  of  view.  Illustra- 
tions of  each. 

vii 


CONTENTS 

PART  I 
THE  PROBLEMS  OF  PRODUCTION 

CHAPTER  HI 
Location  of  the  Plant 25 

The  systematic  approach  is  applied  to  the  problem  of  selecting  a  site  for 
a  factory.  A  number  of  factors  bearing  on  the  suitability  of  any  factory  loca- 
tion are  indicated,  including:  accessibility  of  raw  material  sources  and  of 
markets;  control  and  cost  of  the  more  conveniently  situated  raw  materials; 
labor  supply  and  ciu-rent  wages  in  the  locality;  peculiar  financial  advantages, 
if  any;  adaptability  of  the  type  of  building  to  the  business  needs,  to  the  site; 
lighting  conditions;  water  supply;  drainage  facilities;  accessibility  of  a  suit- 
able residence  district  for  employees;  factory  laws;  taxes;  insurance  rates; 
fire  protection,  etc.  Analysis  and  listing  of  factors  illustrated  from  the  ex- 
perience of  a  silverware  factory  and  a  drain  tile  plant.  Relative  advantages 
of  locations  at  and  away  from  trade  centers. 

CHAPTER  IV 

Construction  and  Equipment  of  the  Plant  ...       40 

The  same  approach  is  applied  to  the  problems  of  choosing  the  best  kind 
of  building  and  of  selecting  the  most  suitable  equipment  for  it.  Among  the 
considerations  involved  in  the  former  are:  the  relative  advantages  of  single- 
story,  multi-story,  hollow  square,  oblong,  and  other  styles  of  buildings,  and 
of  brick,  steel,  concrete,  mill,  and  other  kinds  of  construction,  taking  into 
account  the  funds  available,  the  types  of  machinery  to  be  installed,  and  the 
site  adopted.  The  availability  of  any  type  of  building  and  of  any  kind  of 
building  material  will  be  influenced  by  the  weights  of  raw  materials  and 
manufactured  parts  to  be  moved,  the  cost  of  moving  them  from  floor  to  floor 
as  compared  with  that  of  horizontal  movement,  the  need  of  daylight  illu- 
mination, the  exigencies  of  assembling,  the  probable  growth  of  the  building, 
its  salability,  and  other  indicated  factors.  Illustrations  from  a  New  England 
weaving  mill,  a  Detroit  stove  foundry,  and  other  plants.  Factors  bearing  on 
the  choice  of  equipment,  in  turn,  include:  initial^cost  and  cost  of  upkeep, 
output,  patent  rights,  safety,  etc. 

CHAPTER  V 

Materials  . 53 

A  factory's  policy  as  to  materials  must  be  determined  by  analysis  of  con- 
ditions having  to  do  with  (1)  the  kind  of  material  to  be  used,  (2)  the  quality 
of  material,  (3)  possible  sources,  (4)  control,  and  (5)  utilization  in  the  fac- 
tory. The  kind  selected  should  depend  on  future  as  well  as  present  conditions. 


CONTENTS 

on  the  probability  of  continued  supplies  of  raw  materials  at  reasonable  prices, 
and  the  possibility  of  introducing  a  satisfactory  substitute  in  case  of  shortage 
as  well  as  on  present  salability  and  service.  In  determining  the  quality,  the 
management  must  be  governed  largely  by  financial  and  marketing  consid- 
erations —  the  selling  price  and  the  profit  per  unit  of  output.  By  control  is 
meant,  particularly,  the  maintaining  of  proper  quantities  and  balance  of  raw 
stock  on  hand.  The  carrying  of  excessive  raw  stocks,  according  to  efiiciency 
engineers,  is  a  common  fault  in  American  factories.  The  problem  of  utiliza- 
tion, in  turn,  is  finally  solved  only  when  the  last  by-product  is  used  to  the  best 
advantage.  The  value  of  laboratory  standards.  The  systematic  approach  as 
an  aid  in  solving  each  of  the  five  phases  of  the  problem. 


CHAPTER  VI 
Labor 64 

The  management's  problem  as  to  its  factory  workers  is  to  overcome  what- 
ever indifference,  suspicion,  or  antagonism  they  may  entertain  toward  it  and 
to  make  clear  that  loyalty  to  the  company  is  compatible  with  loyalty  to 
themselves  and  to  labor  organizations,  where  such  organizations  exist.  The 
most  effective  appeal  is  pay  scientifically  proportioned  to  individual  effort. 
In  working  out  such  a  wage  system  the  management  must  hold  to  its  estab- 
lished ratio  of  cost,  quality,  and  service,  cutting  down  cost  where  it  consist- 
ently can.  The  great  defect  of  the  traditional  day  rate  is  that  it  offers  no 
direct  incentive  to  the  individual  to  exert  himself  to  his  full  capacity.  The 
ordinary  piece  rate,  without  at  least  an  approximation  to  scientific  standards, 
gives  too  much  play  to  the  personal  factor  in  fixing  rates.  Among  the  im- 
provements on  these  methods  the  chapter  discusses  the  Franklin,  Towne, 
Rowan,  Halsey,  Emerson,  and  Taylor  systems.  Industrial  training  as  a 
ftrrther  incentive  to  the  workman  and  as  a  policy  profitable  to  the  plant.  New 
outlook  and  opportunities  opened  to  workmen  by  the  training  incidental  to 
scientific  management.  Various  systems  of  instruction  supplied  by  individual 
plants  alone  and  in  cooperation  with  schools  and  universities.  Eliminating 
the  personal  factor  is  nowhere  more  desirable  than  in  dealing  with  unions. 
Thrift  clubs,  "  welfare  work,"  variation  of  employment,  and  other  means  for 
reducing  labor  turnover. 


CHAPTER  VII 

Organization 85 

This  chapter  considers  the  various  methods  of  delegating  authority  in  a 
factory,  the  management's  broad  problem  here  being  to  distribute  authority 
and  supervision  effectively  and  at  the  same  time  retain  control.  Three  dis- 
tinct types  of  shop  organization  are  found  in  practice:  (1)  the  line,  (2)  the 
functional,  and,  midway  between  the  two,  (3)  the  line-and-staff.  In  line 
organization,  which  is  the  traditional  form,  each  department  and  sub-de- 
partment head  is  held  responsible  for  everything  within  his  jurisdiction.  His 
functions  are  thus  of  many  kinds:  hiring  the  men,  placing  them,  planning  and 
apportioning  the  work,  fixing  the  payment,  watching  the  machines,  and  so 


CONTENTS 

on.  The  functional  type,  on  the  contrary,  is  the  strict  application  of  the 
principal  of  the  division  of  labor  to  shop  management.  First,  it  separates 
planning  from  performance.  Then  each  is  subjected  to  subdivision  of  respon- 
sibility. In  a  typical  functional  scheme,  the  planning  is  divided  among  an 
order-of-work  clerk,  an  instruction-card  man,  a  time-and-cost  clerk,  and  a 
shop  disciplinarian,  while  the  direction  of  performance  is  divided  among  a 
gang  boss,  a  speed  boss,  a  repair  boss,  and  an  inspector.  A  line-and-staff 
organization  may  represent  any  one  of  a  variety  of  compromises  between  the 
line  and  functional  types.  Some  one  of  the  three  types  must  be  best  adapted 
to  each  individual  business;  the  systematic  approach  helps  to  determine 
which. 


PART  II 
THE  PROBLEMS  OF  DISTRIBUTION 

CHAPTER  VIII 

Demand  Creation  and  Physical  Supply 99 

Since  the  time  when  barter  and  sale  by  bulk  ceased  to  be  the  universal 
rule,  distribution  has  embraced  the  two  distinct  functions  of  demand  creation 
and  physical  supply.  The  former  is  the  process  of  communicating  to  prospec- 
tive consumers  ideas  about  the  goods  that  w'll  arouse  desire  for  them  and  the 
latter  is  that  of  transferring  the  goods  to  the  consumer.  The  close  relation  of 
the  two  functions  again  illustrates  the  principles  of  interdependence  and 
balance.  To  find  markets  rather  than  to  supply  those  already  active  is  in 
general  the  more  difficult  problem  of  business  to-day.  Until  within  recent 
years,  the  reverse  was  true.  The  long  period  during  which  the  pressm-e  was 
upon  production  rather  than  distribution  accounts  in  part  for  the  fact  that 
distribution  is  now  less  systematized.  The  factors  in  distribution,  including 
the  agencies  of  demand  creation  and  physical  supply,  being  more  imperfectly 
understood  than  those  in  production,  it  follows  that  the  management  must 
give  them  more  of  its  attention.  The  history  of  barter,  sale  by  bulk,  sale  by 
sample,  and  sale  by  description  sketched.  Improved  machinery,  educa- 
tion, and  means  of  communication  among  the  factors  in  the  development. 
Broadly,  the  problem  of  distribution  is  to  arouse  the  desired  maximum  of 
demand  at  a  minimum  of  expense,  and  to  supply  this  demand  with  the  least 
possible  leakage. 

Section  I  —  Demand  Creation 

CHAPTER  IX 

Location,   Construction,  and  Equipment  of  the 

Plant 115 

The  method  of  approach  to  the  problems  of  locating,  building,  and  equip- 
ping a  plant,  developed  in  the  production  section  of  this  book,  is  here  applied 
to  the  corresponding  problems  of  demand  creation.  Shall  the  selling  plant  be 


CONTENTS 

located  at  the  factory,  at  the  largest  neighboring  city,  at  the  largest  trade 
market,  or  at  the  chief  city  of  the  country?  TMiat  type  and  size  of  quarters 
shall  it  occupy?  How  shall  they  be  equipped?  All  these  questions  are  con- 
sidered from  the  standpoints  of  the  production,  administrative,  and  distribu- 
tive departments  of  the  business.  Illustrations  from  the  furniture  and  other 
trades.  Construction  and  equipment  problems,  in  particular,  are  governed  by 
considerations  similar  to  those  applicable  to  factory  construction.  Advertis- 
ing value  as  a  factor. 

CHAPTER  X 

Materials 131 

Following  the  order  of  the  classification,  this  chapter  takes  up  the  first  of 
the  operating  activities  of  demand  creation,  those  having  to  do  with  ma- 
terials. The  materials  of  demand  creation  are  ideas  which,  when  put  into 
circulation  by  certain  available  agencies,  will  cause  consumers  to  want  the 
goods  —  the  agencies  being  middlemen,  salesmen,  and  direct  and  general 
advertising.  The  ideas  can  be  handled  as  definite,  almost  tangible  things. 
The  effect  they  may  be  expected  to  produce  can  be  determined  with  a  degree 
of  accuracy  not  yet  generally  realized.  Moreover,  they  can  be  classified, 
indexed,  and  filed  for  future  use.  Like  the  materials  of  production,  the  ideas 
must  be  considered  from  the  standpoints  of  their  (1)  kind,  (2)  quality,  (3) 
sources,  (4)  control,  and  (5)  utilization.  Certain  elements  of  good  and  bad 
practice  in  these  various  phases  of  the  problem  are  discussed.  The  problem 
is  further  concerned,  as  in  production,  with  the  adoption  and  development  of 
laboratory  standards.  Practical  methods  of  testing  ideas  by  direct  advertis- 
ing and  the  law  of  averages  are  described  and  illustrated.  Results  of  tests 
uphold  these  methods.  Similar  laboratory  tests  through  salesmen  and  other 
agencies  are  practicable. 


CHAPTER  XI 

Agencies    of    Demand    Creation  —  The    Middle- 
man     154 

Beyond  obtaining  the  most  effective  ideas  for  demand  creation,  the  man- 
ager's problem  is  to  determine  which  of  the  available  agencies  —  middlemen, 
exclusive  salemen,  and  direct  and  general  advertising  —  are  adapted  to  trans- 
mit the  ideas  most  effectivelj'  to  possible  purchasers.  One,  two,  or  even  all  of 
the  agencies  may  be  used  by  a  business.  The  tendency  of  many  producers  to 
go  around  the  middleman  is  considered  in  the  light  of  the  development  of  the 
middleman  system.  The  necessary  functions  the  middleman  performs:  shar- 
ing the  risks;  transporting  the  goods;  financing  the  operations;  selling  or 
creating  demand;  and  assembling,  resorting,  and  shipping  the  goods.  The 
rise  of  other  agencies  for  performing  these  functions:  insurance  companies, 
express  companies  and  the  parcel  post,  commercial  banking,  direct  salesmen, 
advertising  mediums  and  agencies,  factory  warehouses  and  branches,  etc. 
The  middleman's  reluctance  to  reduce  his  percentage  of  profit  as  certain  of 
his  functions  have  been  assumed  by  other  agencies  —  the  function  of  demand 
creation  by  producer  advertising,  for  example  —  is  one  cause  of  the  growth  of 


CONTENTS 

direct  selling.  His  aversion  (in  many  instances)  to  new  brands,  based  often 
on  what  from  his  point  of  view  are  sound  enough  reasons,  is  another.  The 
most  efiFective  answers  of  middlemen  to  the  tendency  have  been  combina- 
tions for  buying,  the  adoption  of  house  brands,  controlling  factories,  and 
manufacturing  on  their  own  account.  Summed  up,  the  movement  as  a  whole 
is  one  of  consolidation,  on  the  part  of  trade  as  well  as  of  industry,  its  natural 
effect  being  the  reduction  of  distributive  wastes. 

CHAPTER  XII 

Agencies   of  Demand   Creation  —  Direct   Sales- 
men     178 

Where  the  character,  quality,  or  use  of  an  article  is  not  evident  but  re- 
quires the  demonstration  or  development  of  ideas  imfamiliar  to  the  trade  and 
the  consiuner,  the  work  of  transmitting  its  selling  points  to  the  final  user 
through  two  or  more  middlemen  becomes  difficult  and  uncertain.  Hence, 
for  an  increasing  variety  of  non-staple  articles,  the  direct  salesman  is  recog- 
nized as  an  essential  agent  in  demand  creation.  The  producer's  initial  prob- 
lem as  to  a  direct  sales  force  is  to  determine  whether  such  a  force  is  necessary 
to  create  a  maximum  demand  for  his  goods  with  a  minimum  outlay  of  money. 
Once  he  has  decided  to  use  direct  salesmen,  he  finds  that  his  problems  with 
them,  as  with  factory  workmen,  center  about  four  chief  points  of  contact 
with  the  men:  (1)  hiring,  (2)  training,  (3)  paying,  and  (4)  directing.  Psy- 
chologists and  business  men  are  not  as  yet  agreed  on  anything  approaching 
scientific  tests  for  salesmen,  and  so  the  average  employer  still  depends  on 
personal  "  sizing  up,"  together  with  records  of  past  performances.  While  the 
saying,  "  A  salesman  is  born,  not  made,"  reflects  a  certain  truth,  it  is  more 
significant  that  the  effectiveness  of  salesmen  can  be  multiplied  by  intelligent 
training.  Methods  of  training  described.  The  value  of  standardized  selling 
points  and  processes  reemphasized.  The  broad  problem  of  paying  and  hand- 
ling is  to  keep  the  salesman  exerting  his  best  efforts  after  he  has  achieved  what 
he  conceives  to  be  his  standard.  Standards  based  on  close  analysis  of  selling 
areas  are  part  of  the  solution.  Sales  contests  are  useful  in  some  circumstances 
and  inadvisable  in  others.  To  pay  a  salesman  too  much  or  to  pay  him  the 
right  amount  in  the  WTong  way  may  produce  as  bad  results  as  paying  him  too 
little.  Relative  advantages  of  salary  and  commission  payment.  As  with 
factory  labor,  again,  the  best  payment  is  in  general  that  which  is  most  scien- 
tifically proportioned  to  individual  effort  and  results.  But  the  management 
can  never  have  a  satisfactory  relation  with  its  salesmen  unless  back  of  all  its 
methods  is  a  genuine  friendliness  for  the  men. 


CHAPTER  XIII 
Agencies  of  Demand  Creation  —  Advertising  .    .     199 

Advertising  is  an  outgrowth  of  sale  by  description.  It  may  be  employed 
either  as  a  substitute  for  middlemen  and  salesmen,  for  pm-poses  of  demand 
creation,  or  as  an  auxiliary  to  aid  them  in  their  exercise  of  the  selling  function. 
It  tends  to  displace  these  other  agencies,  in  whole  or  in  part,  whenever  it  is 
a  less  expensive  or  more  effective  means  of  commimicating  ideas  to  the  con- 

xii 


CONTENTS 

sumer.  Illustrations  showing  how  it  justifies  itself  from  the  social  as  well  as 
the  business  point  of  view.  When  waste  occurs  in  advertising,  it  is  generally 
due  to  one  of  five  things :  lack  in  the  product  of  those  elements  of  quality  and 
service  which  appeal  to  the  consuming  public's  need  or  desire,  ignorance  of 
the  true  function  of  advertising,  blundering  application  of  recognized  prin- 
ciples, failure  to  develop  laboratory  standards  for  ideas,  or  neglect  to  keep 
in  operating  balance  the  other  essential  agencies  of  distribution.  The  char- 
acteristics which  peculiarly  commend  advertising  are  its  expansive  reach,  its 
economy,  and  the  complete  control  it  allows  the  management  over  the  pres- 
entation of  ideas  to  prospective  buyers.  Factors  bearing  on  the  formulation 
of  a  policy  as  to  advertising. 

CHAPTER  XIV 

Organization  of  Demand  Creation  —  Analysis  of 

THE  Market 219 

The  problems  incident  to  organizing  for  demand  creation  fall  into  three 
groups,  which  are  concerned  respectively  with  analysis  of  the  market,  fixing 
a  price  for  the  goods,  and  the  combination  and  coordination  of  agencies,  each 
of  the  three  groups  being  an  important  factor  in  the  others.  The  business 
man's  broad  problem  in  analyzing  his  market  is  to  find  where  his  product 
can  be  marketed  profitably,  and  in  approximately  what  quantities.  In  ap- 
proaching the  problem,  he  finds  an  indefinite  body  of  possible  purchasers, 
widely  distributed  geographically,  living  under  the  various  conditions  of 
town  and  country,  and  exhibiting  various  degrees  of  purchasing  power  and 
intelligence,  various  tastes  and  beliefs  and  both  conscious  and  unconscious 
demand.  Every  locality  in  which  it  is  proposed  to  distribute  his  product 
should  be  examined  with  respect  to  these  and  still  other  conditions.  The 
method  of  examination  illustrated.  Tests  of  typical  localities  give  typical 
reactions,  and  thus  show,  at  relatively  small  cost,  the  desirability  or  unde- 
sirability  of  using  the  same  policy  in  a  larger  field.  How  a  market  analysis 
made  it  possible  to  equalize  the  seasons  of  a  department  store.  A  suggestive 
list  of  factors  to  be  considered  in  analyzing  a  market. 

CHAPTER  XV 

Organization  of  Demand  Creation  —  Price  Poli- 
cies     234 

Not  the  cost  of  production  but  the  requirements  of  the  market  are  the 
primary  consideration  in  fixing  prices.  The  manager  has  the  choice  of  three 
general  price  policies:  (1)  selling  at  the  market  minus,  (2)  selling  at  the  mar- 
ket par,  and  (3)  selling  at  the  market  plus.  The  first  policy  aims  to  increase 
volume  of  sales  by  reducing  price.  Ordinarily,  it  does  not  involve  difiFerentia- 
tion  from  other  stock  products  of  like  nature.  Selling  at  the  market  minus  is 
the  easy  method  of  securing  distribution,  although  other  than  economic  mo- 
tives govern  sales  in  many  instances  and  the  middleman's  indifference  be- 
comes an  obstacle  unless  it  is  turned  into  active  interest  by  the  prospect  of 
larger  profit  on  the  new  article.  Subject  to  certain  restrictions,  the  policy 
tends  not  only  to  draw  purchasers  away  from  competitive  goods  but  to  bring 

ziii 


CONTENTS 

new  purchasers  into  the  market.  To  sell  at  the  market  par,  the  merchant 
must,  in  general,  differentiate  his  product  from  those  of  his  competitors  and 
build  up  a  particular  demand  for  it.  Under  this  policy,  new  purchasers  may 
be  drawn  into  the  market  by  giving  the  product  an  added  importance  in  their 
eyes.  Selling  at  the  market  plus  is  perhaps  the  most  characteristic  feature  of 
modern  distribution.  It  makes  the  severest  demands  on  the  ability  of  the 
distributer  and  offers  correspondingly  great  rewards  for  success.  Usually  the 
product  is  more  effectively  differentiated,  more  closely  adapted  to  human 
needs  or  desires,  and  the  large  profits  it  sometimes  brings  —  not  infrequently 
out  of  all  proportion  to  the  added  cost  of  manufacturing  the  article —  may 
be  regarded  as  the  price  society  pays  for  this  special  service. 


CHAPTER  XVI 

Organization  of  Demand  Creation  —  Combination 

OF  Agencies 255 

The  agency  that  is  most  effective  for  demand  creation  in  one  geographic 
or  economic  or  social  division  of  the  market  may  not  be  so  in  another.  The 
manager's  problem  in  this  field,  therefore,  is  to  deiermine  not  merely  which 
agency  is  most  effective  in  any  single  section  or  which  will  serve  passably  for 
all  sections,  but  what  combination  of  agencies  is  most  effective  for  the  entire 
market.  The  method  of  sale  —  by  bulk,  sample,  or  description  —  as  a  factor 
in  the  choice  of  agencies.  Facilities  and  difficulties  offered  by  nuddlemen. 
In  directly  assuming  the  burden  of  demand  creation,  the  manufacturer  has 
the  choice  of  two  agencies,  an  exclusive  sales  force  and  direct  or  general  ad- 
vertising. Combination  of  the  two  is  often  desirable,  because,  while  adver- 
tising has  the  broader  reach,  the  direct  salesman  can  adapt  himself  more 
precisely  to  individual  cases.  And  while  advertising  usually  allows  the  more 
careful  arrangement  of  ideas,  the  salesman  has  the  advantage  of  spontaneity 
and  personal  presence.  The  salesman's  function  is  often  to  follow  up  "  leads  " 
that  result  from  advertising.  Salesmen  and  direct  advertising  may  also  be 
used  separately  or  together  in  combination  with  middlemen.  When  all  are 
used,  it  may  be  preferable  for  the  middleman  to  devote  himself  altogether  to 
physical  supply  or  to  cooperate  with  the  others  in  demand  creation.  The 
interest  of  each  agency  no  less  than  of  the  purchasing  public  is  served  best 
when  each  agency  assumes  the  functions  which  it  can  most  efficiently  perform. 


Section  II  —  Physical  Supply 


CHAPTER  XVII 

Plant  and  Operation  Policies 275 

The  broad  problem  of  physical  supply  is  to  satisfy  the  maximum  of  aroused 
demand  with  minimum  demand  leakage  and  expense,  present  and  future 
sales  both  being  considered.  If  minimum  leakage  of  demand  is  to  be  attained 
—  and  it  is  extremely  important  —  the  principles  of  interdependence  and 


CONTENTS 

balance  must  be  observed  consistently  as  between  production,  physical  sup- 
ply, and  demand  creation,  that  the  first  two  may  keep  pace  with  the  last. 
The  activities  of  physical  supply,  like  those  of  production  and  demand  crea- 
tion, break  up  into  plant  and  operating  activities,  and  these,  in  turn,  into 
corresponding  sub-groups.  Warehouses  and  their  attendant  shipping  facili- 
ties are  the  plant.  The  goods  themselves  are  the  materials.  And  the  agencies 
may  be:  (1)  functional  middlemen  in  the  transportation  field,  including  rail- 
roads, express  companies,  and  the  parcel  post;  (2)  areal  middlemen,  including 
wholesalers  and  retailers;  or  (3)  agencies  of  direct  supply,  including  branch 
houses  and  exclusive  agencies  or  retail  stores.  The  organization  sub-group 
embraces  those  persons  and  arrangements  through  which  physical  supply  is 
immediately  directed  and  supervised.  The  systematic  approach  indicated 
for  each  sub-group,  and  characteristic  factors  suggested. 


PART  III 
THE  PROBLEMS  OF  ADMINISTRATION 

CHAPTER  XVIH 

Plant  and  Operation  Policies 295 

The  facilitating  operations  of  business,  including  those  having  to  do  with 
finance,  purchasing,  employment,  credits,  collections,  accounting  and  audit- 
ing, suggest  unit  handling  under  a  common  executive,  with  authority  corre- 
sponding to  that  of  the  factory  superintendent  and  sales  manager  within  their 
fields,  or  at  least  recognition  of  their  equality  as  a  group  with  the  other  two 
major  divisions  of  business.  This  view  simplifies  the  maintenance  of  inter- 
departmental balance  and  contributes  to  efficiency.  The  activities  of  the 
administrative  group  break  up  in  accordance  with  the  general  classification 
and  yield  themselves  to  the  systematic  approach.  The  nature  and  conditions 
of  the  various  sub-groups  of  activities  considered.  The  character  and  scale  of 
the  business  help  to  define  their  scope.  The  manager's  position,  aloof  from 
routine  concern  with  facilitating  activities  as  well  as  those  of  the  other  de- 
partments, leaves  him  free  to  sense  and  solve  the  larger  activities  of  his  busi- 
ness. 

Conclusion 

CHAPTER  XIX 

The  External  Problems  of  Business 321 

The  business  executive  of  to-day  is  not  the  autocrat  of  a  private  under- 
taking, able  to  base  his  policies  on  personal  whim  or  desire  or  an  entirely 
selfish  conception  of  business.  Society  is  asking  more  seriously  than  ever 
before,  what  besides  the  market  minimum  of  value  and  service  at  the  price 
he  is  going  to  supply  as  its  profit  on  its  investment  of  community  machinery 
and  opportunity.    Besides  the  internal  problems  of  business,  therefore,  the 

XV 


CONTENTS 

manager  has  also  a  pressing  set  of  external  problems  to  solve.  These  problems 
have  to  do  not  merely  with  the  shaping  of  legislation,  but  with  public  opinion, 
upon  which  the  laws  are  formed.  His  task  is  not  only  to  influence  public 
opinion,  but  to  be  influenced  by  it  in  the  formulation  of  his  policies,  when- 
ever justice  and  prudence  dictates  that  course.  Recent  business  legislation 
considered.  Mutual  understanding  between  business  and  society  and  co- 
operation in  behalf  of  the  common  interest  is  the  great  solution. 


XVI 


INTRODUCTION 


AN  APPROACH  TO  BUSINESS 
PROBLEMS 

CHAPTER  I 
THE  ACTI\aTIES  OF  BUSINESS 

WHEN  a  workman  in  a  factory  directs  the  cut  of  a 
planer  in  a  malleable  steel  casting,  he  is  operating 
on  a  piece  of  raw  material  for  the  purpose  of  changing 
its  form. 

When  a  clerk  in  a  store  passes  over  the  counter  to  the 
consumer  a  package  of  factory-cooked  food,  his  opera- 
tion is  one  that  results  in  change  of  place. 

When  a  typist  at  his  desk  makes  out  an  invoice  cov- 
ering a  shipment  of  merchandise,  he  is  operating,  not  to 
change  the  form  of  matter  or  the  place  of  commodities, 
but  to  facilitate  these  changes. 

Isolate  any  phase  of  business,  strike  into  it  anywhere, 
and  the  invariable  essential  element  will  be  found  to 
be  the  application  of  motion  to  materials.  This  may 
be  stated,  if  you  will,  as  the  simplest  general  concept 
to  which  all  the  activities  of  manufacturing,  selling, 
finance,  and  management  can  ultimately  be  reduced. 

Starting  with  this  simple  concept,  then,  it  becomes 
evident  that  we  have  an  easy  and  obvious  basis  for  the 
classification  of  business  activities.    With  the  philo- 

1 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

sophical  aspects  of  the  concept  itself  I  am  not  here  con- 
cerned. SuflBcient  that  it  gives  us  a  simpHfying,  unify- 
ing principle  from  which  to  proceed,  instead  of  a  mere 
arrangement  by  kind  or  characteristic,  of  the  materials, 
men,  operations,  and  processes  which  we  see  in  the 
various  departments  of  a  business  enterprise. 

The  nature  of  the  motion  does  not  of  itself  supply  the 
key  to  a  usable  classification.  For  while  the  action  may 
be  characteristic  of  one  part  of  a  business  and  not  dupli- 
cated elsewhere,  like  the  pouring  of  molten  metal  in  a 
foundry  or  the  making  up  of  a  pay  roll,  it  may,  on  the 
contrary,  be  common  to  all  the  departments  into  which 
the  organization  is  divided,  like  the  requisition  of  a 
dozen  lead  pencils  or  a  box  of  paper  clips.  It  is  not  until 
we  single  out  the  common  fundamental  element  and 
inquire  "  What  is  the  purpose  of  this  motion?  "  that  we 
find  the  key. 

I  do  not  wish  to  exaggerate  the  importance  of  this 
simple  and  apparently  obvious  idea;  but  for  me  it  has 
opened  a  way  to  locate  the  activities  of  business  and 
disclose  their  relations  to  one  another  and  to  their  com- 
mon object,  and  so  has  proved  a  thing  of  daily  use.  For 
the  final  function  of  the  classification,  as  it  is  the  prac- 
tical problem  of  all  business,  is  to  find  those  motions 
which  are  purposeless,  so  that  they  may  be  eliminated, 
and  to  discover  new  motions  of  sound  purpose,  that 
they  may  be  introduced. 

If  you  study  an  individual  motion  or  operation  in  it- 
self and  in  relation  to  the  other  activities  surrounding 
it  and  no  satisfactory  answer  can  be  found  to  the  ques- 
tion, "  What  is  its  purpose.'*  "  you  have  strong  grounds 
for  assuming  that  it  is  a  non-essential  and  useless  mo- 
tion.   It  may  have  the  sanction  of  house  tradition  or 

2 


THE  ACTIVITIES  OF  BUSINESS 

trade  custom,  but  its  superfluous  character  persists  and 
the  wisdom  of  eliminating  it  becomes  plain.  Conversely, 
a  motion  proposed  for  adoption  may  never  before  have 
been  tried  in  the  trade,  but  that  alone  is  not  an  argu- 
ment against  it.  Purpose  again  is  the  decisive  test. 
From  the  social  standpoint,  any  motion  which  has  no 
valid  purpose  is  economically  useless  and  wrong.  The 
effect  of  such  a  motion  in  business,  like  the  effect  of 
omitting  a  useful  motion,  is  to  keep  down  profits  when 
they  might  reasonably  rise. 

From  the  manager's  point  of  view,  then,  the  purpose 
of  the  analysis  is  not  alone  to  place  the  activities  of 
business  and  trace  out  their  relations,  but  to  order  his 
thought  so  that  he  can  more  readily  see  what  activities 
he  should  discontinue  and  what  others  he  should  add. 

This  does  not  always  mean  a  reduction  in  the  total 
number  of  motions.  In  our  roundabout  system  of  pro- 
duction,^  with  its  minute  subdivision  of  labor,  it  is  pos- 
sible to  make  a  greater  number  and  variety  of  motions 
and  distribute  them  over  a  longer  period  of  time,  yet 
increase  the  eventual  output  or  decrease  the  cost 
through  the  group  effectiveness  of  all  the  motions. 

In  the  three  operations  mentioned  above  —  those  of 
the  factory  workman,  the  retail  clerk,  and  the  oflSce 
typist  —  each  application  of  motion  was  for  an  eco- 
nomically valid  purpose  and  each  instance  was  typical 
of  one  of  the  three  great  groups  of  business  activities: 

1.  The  activities  of  'production,  which  change  the 
form  of  materials. 

2.  The  activities  of  distribution,  which  change  the 
place  and  ownership  of  the  commodities  thus  produced. 

3.  The  facilitating  activities,  which  aid  and  supple- 

1  See  E.  V.  Bohm-Bawerk,  "  Positive  Theory  of  Capital,"  pp.  17-20. 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

ment  the  operations  of  production  and  distribution.  No 
adequate  descriptive  term  suggests  itself ;  facilitation  is 
awkward,  administration  is  inexact  because  it  suggests 
all  the  relations  of  the  management  to  a  business  rather 
than  a  separate  group  of  functions  toward  which  the 
manager  should  maintain  the  same  sort  of  relations  as 
with  those  of  production  and  distribution.  I  shall,  how- 
ever, for  convenience  use  the  term  administration  in 
this  narrower  sense. 

Whatever  the  nature  or  kind  of  any  business  activity, 
its  final  effect  is  one  of  the  three  just  indicated.  Such  a 
categorical  grouping  is  necessary  in  any  schematic  ap- 
proach to  the  problems  of  business;  for  out  of  the  rela- 
tions of  these  activities,  each  with  the  others  and  with 
the  materials  affected,  emerge  those  problems  with 
which  this  book  is  concerned. 

Before  we  take  up  the  study  of  the  individual  prob- 
lems, it  may  be  well  to  make  a  brief  general  survey  of 
the  three  groups  and  note  certain  likenesses  and  differ- 
ences that  characterize  these  groups  of  activities. 

Production  is  relatively  well  standardized.  In  any 
scrutiny  of  practical  business,  it  becomes  clear  that  the 
manager  concerns  himself  less  with  the  activities  of  pro- 
duction than  with  those  of  distribution  and  administra- 
tion. The  problems  of  the  factory  as  a  rule  demand,  on 
his  part,  less  of  analysis  and  synthesis,  less  of  study  and 
experiment  and  constructive  thought  because  produc- 
tion has  been  brought  much  nearer  to  standardization 
in  its  operations  and  policies. 

For  upwards  of  a  century  economic  conditions  di- 
rected the  attention  of  the  ablest  business  minds  to  the 
perfection  of  manufacturing  processes  rather  than  the 
development  of  sales  methods.    The  market  expanded 


THE  ACTIVITIES  OF  BUSINESS 

fast  enough  to  absorb  the  increased  offerings:  the  big 
prizes  went  to  the  men  who  could  speed  up  production 
without  adding  to  the  expense  of  a  unit  of  product.  Im- 
provement of  factory  methods  and  processes,  too,  was 
the  manifest  way  to  economy  and  profit.  The  factors 
involved  —  machines,  materials,  the  actions  of  men  — 
were  all  concrete,  visible  things  which  daily  thrust  them- 
selves on  the  attention  of  the  manager.  Short  cuts  al- 
most suggested  themselves.  Lost  motions  and  other 
inefficient  applications  of  human  or  mechanical  energy 
made  themselves  apparent  to  men  of  open  minds  and 
demanded  study  until  the  wastes  were  reduced  and 
better  methods  inaugurated.  Because  every  operation 
was  easily  distinguishable  from  every  other  one,  the  ad- 
vantages attending  the  division  of  labor  were  discovered 
and  the  application  of  the  principle  extended.  This 
took  place,  however,  without  affecting  the  processes  of 
distribution  in  any  marked  degree. 

As  a  consequence  of  this  century  of  invention,  de- 
velopment, and  refinement,  production  is,  in  point  of 
systematized  economy,  far  more  advanced  than  dis- 
tribution. Moreover,  there  have  developed,  on  the 
factory  side,  recognized  classes  of  specialists  —  tech- 
nically trained  superintendents,  engineers,  chemists, 
designers,  foremen  —  who  are  capable  of  assuming,  and 
frequently  do  assume,  all  the  responsibilities  of  pro- 
duction. 

In  distribution  and  administration  there  enters  a  dif- 
ferent set  of  factors,  more  largely  psychological.  Men 
meet  not  only  as  units  in  a  business  organization  —  as 
colleagues,  subordinates,  and  superiors  —  but  also  in  the 
delicate  personal  relations  of  seller  and  buyer.  Produc- 
tion problems  are  usually  problems  involving  the  cost 

5 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

of  materials,  of  labor,  of  equipment,  and  so  on.  In  dis- 
tribution, on  the  contrary,  the  factor  of  cost  is  over- 
shadowed by  that  of  price,  and  the  latter  is  determined 
largely,  at  times,  by  changing  conditions  over  which  the 
seller  has  very  little  control.  Competition,  encountered 
to  some  extent  in  the  field  of  production,  in  the  hiring 
of  men,  the  buying  of  materials  and  the  like,  is  in  the 
field  of  distribution  almost  ever-present  and  frequently 
acute. 

Finally,  there  are  few  trained  experts  in  distribution 
and  administration,  and  few  absolute  standards  of  prac- 
tice, except  perhaps  in  the  special  field  of  accounting. 
The  approach  to  the  problems  of  these  groups,  there- 
fore, as  contrasted  with  those  of  production,  is  still 
largely  empirical. 

It  would  seem,  then,  the  logical  plan  to  consider  first 
the  activities  of  production,  since  here  conditions,  reac- 
tions, and  results  have  been  reduced  to  something  like 
accepted  standards;  then,  after  developing  and  demon- 
strating in  this  known  and  charted  field  a  method  of 
analysis,  a  standard  classification  and  a  systematic  ap- 
proach to  business  problems,  to  apply  this  approach  and 
analysis  to  distribution  and  administration,  about  which 
so  much  less  is  known  and  the  factors  of  which  are  all 
less  tangible,  less  understood,  and  more  variable. 

The  function  of  the  general  manager  of  a  business  is 
to  coordinate  and  direct  these  three  groups  of  activities. 
Therefore  it  is  practical  as  well  as  convenient  that  we 
should  approach  them  from  his  point  of  view,  the  course 
of  our  approach  itself  indicating  what  that  point  of 
view  should  be.  This  will  bring  out  and  establish  the 
permanent  strategic  position  he  should  occupy  toward 
all  three.   Further,  in  treating  general  policies  involving 

6 


THE  ACTIVITIES  OF  BUSINESS 

coordination  of  the  problems  arising  under  each,  a  uni- 
form method  of  approach  will  be  outlined  and  applied. 

Every  manager  maintains  and  must  maintain  certain 
definite  policies  toward  production,  distribution,  and 
administration.  In  determining  what  these  policies 
shall  be,  there  are  at  least  two  basic  principles  of  which 
he  must  never  lose  sight.  The  first  of  these  is  the  inter- 
dependence of  all  business  activities.  Each  has  rela- 
tions more  or  less  direct  with  all  other  activities.  No 
problem  can  be  solved,  therefore,  without  making  al- 
lowances for  the  connection  the  solution  may  have  with 
other  problems. 

In  their  broader  aspects,  this  mutual  interdependence 
extends  to  all  the  activities  of  production,  distribution, 
and  administration.  No  business  problems  are  strictly 
intra- departmental.  They  all  have  implications  reach- 
ing out  and  affecting  activities  in  other  departments. 
The  extent  and  importance  of  these  is  unobserved  by 
many  managers  at  present;  hence,  most  businesses  are 
out  of  adjustment. 

Every  man  of  experience  will  recognize  this  interde- 
pendence, I  think,  as  a  fundamental  principle  in  bus- 
iness. Likewise  the  corollary  principle,  that  a  balance 
must  be  maintained  in  these  relations.  The  ratio  of  cost, 
quality,  and  service  observed  in  the  actual  manufacture 
of  a  product,  for  example,  must  be  the  same  as  that  put 
forward  by  the  sales  force.  Otherwise  customers  will  be 
dissatisfied,  internal  friction  will  develop,  and  efficiency, 
good  will,  and  profits  will  suffer.  If,  on  a  scale  of  100, 
the  stress  on  quality  stands  at  60  in  the  production  de- 
partment, it  must  stand  at  60  in  the  distribution  and  the 
administration  departments.  The  credit  policy  must 
balance  with  the  production  policy,  the  purchasing  with 

7 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

the  selling,  and  the  selling,  again,  with  the  production; 
and  so  on.  If  production  is  under  pressure  to  manufac- 
ture at  low  cost  with  relative  indifference  to  quality, 
while  distribution  bases  its  appeals  upon  quality  and 
service,  the  business  is  clearly  out  of  adjustment.  The 
production  force  is  not  delivering  the  kind  of  thing  that 
the  distribution  force  is  trying  to  sell. 

The  lack  of  proper  adjustment  and  balance  in  many 
businesses  is  not  surprising  when  we  remember  that  the 
average  business  exists  because  the  man  behind  it  is  a 
specialist.  He  has  capitalized  his  buyer's  instinct  for 
values,  his  salesman's  tact  and  enthusiasm,  or  his  ability 
and  patience  as  a  shop  organizer.  He  has  built  on  this 
special  talent  and  comes  to  depend  on  it  too  exclusively. 
This  departmental  bias,  if  permitted  to  run  its  course, 
carries  the  grave  consequences  of  a  failure  in  efficiency. 
The  department  on  which  the  manager  concentrates 
must  carry  the  burden  of  those  he  neglects ;  as  a  conse- 
quence, the  growth  of  the  business  is  impaired. 

Perhaps  the  worst  effect  of  departmental  bias  is  seen 
in  what  might  be  called  the  tangential  development  that 
takes  place  in  certain  cases  of  joint  or  composite  man- 
agement, where,  for  instance,  a  man  strong  in  selling 
takes  for  a  partner  a  man  strong  in  production,  and  the 
two  proceed  to  manage  the  business  together,  each 
stressing  his  specialty  without  regard  for  the  principle 
of  interdependence.  Instead  of  a  straight  parallel  pull 
toward  a  common  goal,  such  as  observance  of  the  prin- 
ciple of  interdependence  would  insure,  their  pull  be- 
comes more  and  more  tangential,  their  angles  with  the 
business  become  wider  and  wider,  until  finally  each  is 
pulling  squarely  against  the  other,  and  the  business 
comes  to  a  standstill. 

8 


THE  ACTIVITIES  OF  BUSINESS 

I  once  heard  a  production  engineer  in  New  York  speak 
of  selling  as  a  "  necessary  evil."  The  owner  of  a  great 
business  who  was  present  disagreed  with  him  and  said 
quite  as  emphatically  that  selling  was  the  one  vital 
function.  Knowing  that  the  sales  enthusiast  had  built 
up  a  remarkable  business  from  a  small  beginning,  I  took 
the  trouble  to  check  his  statements  about  his  company's 
experience.  What  I  found  was  this.  The  owner  per- 
sonally concentrated  on  selling  and  honestly  believed 
that  selling  was  the  function  which  contributed  most  to 
the  success  of  a  business.  But  he  had  instinctively 
gotten  hold  of  the  principle  of  interdependence,  and  had 
surrounded  himself  with  men  in  other  departments  who 
were  strong  in  their  lines  and  who  supplemented  his  own 
specialty  without  straying  into  tangential  development. 
Thus  the  activities  of  production  and  administration 
were  properly  coordinated  with  those  of  distribution. 
The  business  was  a  success  because  the  owner  had  un- 
consciously observed  the  principle  of  interdependence 
without  formulating  it  or  perhaps  without  being  aware 
that  it  was  something  to  be  formulated. 

A  very  commonplace  illustration  will  show  how  in- 
timately the  principles  of  interdependence  and  balance 
apply  in  the  mere  routine  detail  of  department  policy, 
and  also  show  how  rapidly  the  manager's  thought  must 
pass  from  considerations  involving  the  one  principle  to 
those  involving  the  other.  Take  the  case  of  a  concern 
proposing  to  install  an  automatic  conveyor  in  its  fac- 
tory. Here  are  some  of  the  questions  which  a  consider- 
ation of  these  principles  should  bring  at  once  to  the 
mind  of  the  manager : 

Is  the  estimated  charge  for  interest,  upkeep,  and  de- 
preciation more  than  the  present  cost  for  trucking?  If 
\  9 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

so,  of  how  much  importance  is  this  factor  of  added  ex- 
pense? To  what  degree  does  the  additional  tax  on  capi- 
tal operate  against  the  change?  If  speedier  work  can  be 
done  in  the  shop,  quicker  delivery  and  a  more  rapid 
turnover  may  cut  the  overhead  to  counterbalance  the 
added  expense.  How  important,  then,  is  quicker  de- 
livery as  a  factor  in  distribution? 

What  will  be  the  effect  on  the  rest  of  the  production 
process?  Will  the  automatic  conveyor  facilitate  or  re- 
tard the  progress  of  parts  or  partly  finished  goods  from 
machine  to  machine  or  department  to  department? 
Will  a  fixed  rate  of  progress  for  work  lead  to  carelessness 
and  hurry  in  any  section  and  the  possible  sacrifice  of 
quality?  Or  will  the  conveyor,  by  reason  of  the  more 
even  flow  of  work  in  process,  contribute  to  both  qual- 
ity and  service?  Will  there,  finally,  be  an  advertising 
advantage  in  the  use  of  the  conveyor,  like  the  "  un- 
touched-by-human-hands "  argument  which  in  the  case 
of  a  food  product  might  be  a  distinct  factor  in  the  pop- 
ular estimate  of  its  desirability  ? 

Here  we  may  plainly  see  to  what  extent  an  apparently 
intra-departmental  problem  spreads  out  and  becomes 
inter-departmental;  and  also  how  the  constituent  fac- 
tors should  be  judged  with  due  regard  for  a  balance  be- 
tween cost,  quality,  and  service. 

Since  so  much  depends  on  strict  conformity  to  these 
two  principles,  the  manager  should  be  placed  where  he 
can  observe  them  impartially.  He  should  occupy  a 
detached,  supervisory  position  over  all  departments, 
free  from  routine  concern  with  the  details  of  any.  Or,  if 
the  business  is  small  and  it  is  necessary  for  him  to  serve 
also  as  a  department  oflficial,  he  should  cultivate  the 
habit  of  withdrawing  mentally  to  the  position  here  in- 

10 


THE  ACTIVITIES  OF  BUSINESS 

dictated  when  performing  his  managerial  functions.  I 
was  careful  to  say  that  the  manager  should  be  free  from 
routine  concern  with  departmental  details,  because  he 
will  probably  spend  the  greater  part  of  his  time  dealing 
with  symptomatic  details  whose  importance  is  not  to 
be  measured  by  their  size  or  the  amount  involved.  A 
customer's  complaint  involving  thirty-five  cents  may 
in  itself  be  a  trifle.  If  it  points  the  way  to  a  weak  link 
in  distribution,  however,  and  this  in  turn  shows  a  cor- 
responding lack  of  coordination  in  production  or  ad- 
ministration, it  becomes  significant  and  presents  a 
problem  for  the  manager. 

In  the  position  described,  aloof  from  the  various 
groups  of  his  business  activities,  the  manager  can  more 
readily  free  himself  of  the  tendency  toward  bias,  which 
is  exceedingly  strong  when  he  keeps  a  routine  connec- 
tion with  any  one  department,  or  involves  himself  any- 
where in  non-symptomatic  detail.  He  can  keep  a  clear 
vision  and  true  perspective  of  the  whole  field.  He  can 
coordinate  the  functions  of  the  three  departments, 
shaping  them  all  in  accordance  with  the  relations  which 
he  wishes  to  maintain  between  his  business  and  the 
public.  It  is  only  from  such  a  detached  position,  in- 
deed, that  he  can  see  clearly  what  these  relations  should 
be;  can  take  from  the  public  the  suggestions  and  in- 
centives which  he  needs,  and  can  gain  a  broad  and  com- 
prehensive view  of  the  workings  of  his  own  organization 
and  the  possibilities  of  the  markets  that  it  serves. 

I  have  said  of  the  principles  of  interdependence  and 
balance  that  at  least  these  two  should  be  observed  by 
every  manager.  Are  there  not  other  principles  just  as 
simple  and  profitable  as  these,  some  already  known  to 
business  practice  but  others  yet  to  be  detected  and  de- 
ll 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

fined?  Is  it  too  much  to  hope  that  the  movement  of 
analytical  business  thought  may  in  time  distinguish  a 
whole  body  of  business  principles  —  principles  now 
operating  unnoticed  wherever  there  is  a  factory,  a  store, 
or  an  office?  Not,  it  seems  to  me,  until  we  gain  by 
some  such  process  a  clearer  understanding  of  the  forces 
with  which  we  are  dealing  can  we  realize  the  fullness 
of  individual  and  social  freedom  into  which  industry  is 
capable  of  bringing  us. 


12 


CHAPTER  II 
A  METHOD  OF  APPROACH  TO  BUSINESS  PROBLEMS 

WE  have  seen  that  every  activity  of  business,  what- 
ever its  nature,  will  find  itself  in  one  of  three  great 
groups  of  business  activities  —  production,  distribu- 
tion, or  administration.  On  closer  examination,  it  is 
seen  that  the  activities  of  each  group  yield  themselves 
to  a  further  classification,  and  that  this  classification  is 
almost  identical  for  each  group. 

Thus  the  activities  of  production  split  according  to 
their  purpose  into  those  having  to  do  with  the  prepara- 
tion of  a  ready-to-run  factory,  which  for  convenience 
we  may  call  plant  activities,  and  those  having  to  do 
with  the  operation  of  the  factory,  which  will  be  termed 
operating  activities.  Plant  activities  divide  into  those 
concerned  with  (1)  location,  (2)  construction,  and  (3) 
equipment  of  the  plant.  Operating  activities  are  those 
relating  directly  to  (1)  materials,  (2)  the  agencies  proc- 
essing the  materials,  with  labor  as  the  first  to  be  con- 
sidered, and  (3)  the  coordination  and  direction  of  factory 
processes. 

In  distribution,  two  distinct  functions  dictate  a  broad 
preliminary  division.  One  of  these,  demand  creation, 
is  concerned  with  the  making  of  a  market  for  the  goods, 
through  the  transmission  of  ideas  about  them  to  pos- 
sible purchasers.  The  other  function,  that  of  physical 
supply,  consists  of  the  operations  necessary  to  put  the 
buyer  in  possession  of  the  goods.   But  the  activities  of 

13 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

each  of  these  groups  break  up  into  two  sub-groups  like 
those  of  production :  plant  activities,  which  are  occupied 
with  location,  construction,  and  equipment,  and  operat- 
ing activities,  which  relate  to  materials,  agencies,  and 
organization.  The  materials  of  demand  creation  are 
ideas  about  the  goods;  in  physical  supply  they  are  the 
actual  merchandise  delivered. 

Again,  in  the  third  major  division  of  business,  the  ac- 
tivities of  administration  group  themselves  along  the 
same  lines  as  in  production  and  distribution.  On  the 
plant  side,  they  closely  parallel  those  of  demand  crea- 
tion, because  of  the  physical  likeness  of  the  functions 
performed.  Operating  policies,  however,  although  they 
have  to  do  with  the  usual  three  groups  of  activities  — 
materials,  agencies,  and  organization  —  are  governed 
in  part  by  factors  which  do  not  appear  elsewhere.  So 
far  as  its  chief  function  goes,  each  administrative  de- 
partment has  direct  relations  with  the  manufacturing 
or  selling  department  whose  work  it  facilitates,  as  well 
as  with  the  other  units  of  its  organization  group.  In 
addition,  the  materials  to  which  motion  is  applied  are 
paper  representations  of  the  activities  facilitated. 

Here,  then,  are  the  three  great  general  groups  of  busi- 
ness activities,  with  numerous  subordinate  groupings 
under  each.  All  along  the  lines  of  the  classification,  at 
this  point  and  at  that,  arise  the  practical  problems  of 
business.  Above  and  outside  the  groups  stands  the 
manager.  Keeping  constantly  in  mind  the  vital  prin- 
ciples of  interdependence  and  of  balance,  his  task  is  to 
solve  these  problems. 

Before  developing  a  definite  method  of  approach  to 
their  solution,  however,  something  may  be  said  about 
the  qualifications  and  general  state  of  mind  of  the  suc- 

14 


A  METHOD  OF  APPROACH 

cessful  business  man.  Calm,  deliberate  analysis  is  an 
important  factor;  imagination,  judgment,  courage,  and 
executive  ability  are  others.  To  quote  Professor  Taus- 
sig: "  Executive  ability  is  probably  less  rare  than  the 
combination  of  judgment  with  imagination.  But  it  is  by 
no  means  common.  It  calls,  on  the  one  hand,  for  intel- 
ligence in  organization;  on  the  other  hand,  for  knowl- 
edge of  men.  The  work  must  be  planned,  and  the  right 
man  assigned  to  each  sort  of  work."  ^ 

How  does  the  able  manager  differ  from  the  ordinary 
business  man.?  Or  the  conspicuously  successful  concern 
from  that  whose  margin  of  profit  is  never  very  wide  or 
safe? 

I  am  inclined  to  think  that  the  difference  between 
moderate  and  distinctive  success  in  business  is  in  the 
main  just  a  sum  of  individually  small  advantages.  The 
average  employer,  for  instance,  contents  himself  with 
the  run  of  the  labor  market,  and  pays  approximately 
the  market  price.  The  able  manager,  on  the  contrary, 
recognizes  that  there  are  many  grades  of  executives, 
salesmen,  mechanics,  and  clerks,  and  that  the  difference 
in  productive  capacity  between  competent  and  mediocre 
workers  is  almost  always  greater  than  the  difference  in 
the  cost  of  their  labor.  He  makes  it  his  business,  there- 
fore, to  pick  out  and  hire  the  best  individuals  available 
for  each  type  of  service  required,  going  beyond  the 
local  market  if  that  supply  is  unsatisfactory. 

From  this  careful  selection  of  help,  he  gets  his  first 
differential  of  profit  on  labor.  But  it  is  only  the  first  in 
a  series.  He  has  learned  that  even  skilled  and  indus- 
trious men  are  capable  of  much  greater  effort  than,  of 
themselves,  they  are  likely  to  put  forth.  His  part,  then, 

^  F.  W.  Taussig,  "  Principles  of  Economics,"  Vol.  II,  page  164. 
15 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

is  to  supply  the  conditions  and  the  stimulus  which  will 
tap  these  reserve  powers  and  bring  them  to  bear  on  the 
day's  work.  All  along  the  line,  such  further  differen- 
tials come  to  him:  from  his  control  of  operations,  the 
quality  of  the  training  and  supervision  he  gives  his  men, 
the  class  and  condition  of  his  equipment,  the  conven- 
ience and  certainty  of  his  system  of  work-supply,  his 
method  of  paying  for  work  accomplished,  and  a  host  of 
indirect  factors  like  the  lighting,  heating,  cleaning,  and 
ventilation  of  his  workrooms  and  offices. 

Moreover,  all  these  advantages  tend  to  augment  and 
multiply  one  another.  Greater  output  is  not  the  only 
effect  of  the  able  manager's  discriminating  labor  policy. 
He  gets  also  a  more  even,  if  not  a  superior,  product. 
This  builds  up  his  "  good  will  "  and  facilitates  sales. 
Increasing  sales  and  growing  prestige  in  turn  invite 
favors  from  raw  material  supply  houses,  banks,  and 
transportation  companies;  and  these  favors  tend  pro- 
gressively to  greater  volume  of  business,  smaller  unit 
costs,  and  larger  profits.  So  the  small  advantages,  if 
consistently  cultivated  and  conserved  throughout  a 
business,  make  in  the  long  run  an  enormous  difference. 

Here  is  indicated  a  further  principle,  that  of  cumu- 
lative differentials,  which  no  manager  can  well  ignore. 
For  who  will  say  that  even  the  notable  innovators,  men 
like  McCormick,  Field,  Henry  Ford,  the  Butlers,  and 
Montgomery  Ward,  could  have  developed  great  ideas 
into  mighty  businesses  without  constant  observance  of 
this  principle. 

But  how  characterize  the  unsuccessful?  Broadly 
speaking,  there  are  at  least  two  classes  of  business  men 
whose  inefficiency  is  due  to  faults  of  temper.  There  is 
the  excitedly  busy  man  who  attempts  to  know  every 

16 


A  METHOD  OF  APPROACH 

detail,  and  so  loses  what  is  significant  in  the  mass  of 
what  is  not.  His  desk  is  piled  with  papers.  He  always 
insists  that  no  step,  however  trivial,  be  taken  without 
his  immediate  supervision.  It  is  of  this  kind  of  ineffi- 
ciency that  Bagehot  ^  was  thinking  when  he  wrote  that 
if  the  head  of  a  large  business  "  is  very  busy,  it  is  a  sign 
of  something  wrong."  Another  class  of  inefficients  is 
composed  of  the  trouble  borrowers.  Here  the  typical 
man  anticipates  his  problems.  He  expends  his  energies 
in  worrying  about  questions  which  never  arise,  or  when 
they  do  arise,  solve  themselves  almost  automatically. 

As  Dean  Bailey  of  Cornell  once  said  in  a  talk  to  his 
students:  "Many  problems  solve  themselves  if  left 
alone.  I  suggest  that  each  man  give  himself  lessons  in 
the  gentle  art  of  keeping  cool."  When  the  crucial  time 
comes,  the  solution  can  be  worked  out  in  the  light  of 
actual  conditions  rather  than  of  probabilities.  Business 
changes  too  quickly  for  the  solution  of  to-day  to  be  of 
much  service  to-morrow.  Styles,  the  market,  labor  con- 
ditions may  shift.  Indeed,  the  example  of  Napoleon, 
who  is  said  to  have  filed  his  letters  thirty  days  ahead 
before  answering  them,  has  its  moral  for  many  business 
men.  Not  that  such  a  policy  could  be  taken  over  bodily 
into  business.  The  illustration  is  extreme.  But  it  serves 
to  emphasize  my  point.  The  business  man  should  not 
go  out  to  meet  problems  which  are  not  yet  due  and  may 
never  arise.  "  The  great  art  is  to  be  governed  by  time," 
the  Corsican  genius  declared;  "  that  which  ought  not 
to  be  done  until  1810  cannot  be  done  in  1801."  The 
energy  of  the  executive  must  be  conserved  for  the  big 
problems  actually  before  him,  which  demand  the  con- 
centration of  his  best  efforts. 

^  Walter  Bagehot,  "  Lombard  Street,"  Chapter  VIII. 
17 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

The  trouble  with  a  great  many  men  in  business  is  that 
they  have  no  definite  and  ordered  way  of  going  at  their 
problems.  When  a  new  situation  or  emergency  arises, 
they  take  counsel  with  this  man  and  that,  waver  from 
one  viewpoint  to  another,  and  allow  themselves  to  be 
influenced  in  one  direction  or  another  by  the  opinions 
and  snap  judgments  of  advisers  who  have,  perhaps,  an 
entirely  erroneous  conception  of  the  issue  involved. 
Instead  of  analyzing  the  problem  and  locating  all  the 
activities  which  affect  and  are  affected  by  its  solution, 
they  see  it  only  from  what  appears  to  be  the  principal 
function  involved.  Lacking  a  systematic  method  of 
approach,  they  come  to  a  conclusion  which  sacrifices 
more  advantages,  perhaps,  than  it  conserves. 

The  first  step  in  this  approach  is  the  elimination  — 
at  least,  the  recognition  —  of  the  personal  equation. 
Immediately  a  new  proposition  is  brought  up,  this  ques- 
tion almost  always  intrudes:  "  How  will  this  affect  me 
personally?  "  The  first  reaction  is  almost  sure  to  be 
based  on  personal  convenience.  Will  extra  time  or 
extra  effort  be  required.'^  Yet  if  the  business  man  is  to 
solve  his  problems  scientifically,  he  must  look  at  them 
as  a  scientist  looks  at  his  —  objectively.  This  may  at 
first  thought  seem  simple.  It  is  in  fact  very  difficult. 
Most  men  cannot  detach  themselves.  Sometimes  it  re- 
quires a  determined,  conscious  effort. 

Then  the  problem  must  be  resolved  into  its  constitu- 
ent problems,  for  nearly  every  problem  which  arises  in 
business  is,  as  it  were,  a  bundle  of  distinct  minor  prob- 
lems, which  together  make  up  the  whole.  But  if  the 
composite  problem  is  analyzed,  and  the  individual  units 
in  the  bundle  are  put  into  their  proper  places,  the  broad 
policy  can  be  seen  in  its  true  proportions.   Many  of  the 

18 


A  METHOD  OF  APPROACH 

minor  problems  can  be  solved,  sometimes  almost  at  a 
glance.  And  the  solution  of  the  big  problem  will  become 
more  and  more  simple  as  these  individual  solutions  can- 
cel off.  So  it  is  true  that  a  problem  thus  analyzed  often 
solves  itself. 

Take  such  a  simple  case  as  that  of  inaugurating  a  sys- 
tem of  approval  shipment.  Some  of  the  sub-problems 
are  indicated  in  the  following  questions:  What  will  be 
the  effect  on  collections  and  on  the  cost  of  shipment? 
What  is  to  be  the  credit  policy  ?  Will  the  stock  in  trans- 
it or  in  the  hands  of  customers  reduce  the  number  of 
turnovers  per  year.'*  Will  the  risk  of  damage  to  re- 
turned goods  be  great  enough  to  jeopardize  the  reg- 
ular profit  .f^  Will  the  increase  in  sales  more  thaji 
offset  any  added  cost  in  the  administration  depart- 
ments.'^ Yet  no  consideration  of  this  broad  problem 
would  be  complete  without  taking  into  account  the 
psychological  factors  in  selling,  such  as  customers'  curi- 
osity and  caution. 

After  a  problem  has  been  separated  into  its  constitu- 
ent problems,  the  factors  entering  into  the  solution  of 
each  should  be  assembled,  perhaps  listed,  especially 
where  a  large  number  of  varying  elements  is  to  be  con- 
sidered. The  advantage  of  listing  the  factors  is  clear. 
It  is  always  simpler  to  deal  with  a  situation  if  you  have 
all  its  elements  before  you  in  black  and  white.  Proper 
weighing  and  cancellation  can  be  done  more  accurately 
and  deliberately  than  if  the  attempt  is  made  mentally  to 
keep  track  of  the  factors  and  at  the  same  time  deter- 
mine their  values.  In  fact,  when  all  the  elements  are 
set  down  in  logical  order,  it  may  be  possible  to  reduce 
them  to  something  approaching  a  mathematical  basis 
of  values.   The  measure  of  each  factor  must  be  more  or 

19 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

less  an  approximation,  but  usually  each  can  be  expressed 
in  terms  of  percentages. 

The  last  step  is  to  take  a  fresh  point  of  view  —  to 
look  at  the  problem  as  a  new  problem,  one  never  solved 
before.  It  is  impossible  to  overemphasize  the  impor- 
tance of  the  fresh  point  of  view.  I  do  not  mean  that  ex- 
perience is  of  no  value,  but  that  it  is  not  to  be  relied 
upon  to  the  exclusion  of  experiment  and  initiative. 
The  value  of  this  open-mindedness  is  well  expressed  in  a 
letter  from  a  firm  of  efficiency  engineers  to  a  manufac- 
turer of  national  reputation.  It  is  well,  they  said,  "  to 
put  your  business  under  the  microscope  of  the  produc- 
tion engineer  for  these  reasons :  We  analyze  your  busi- 
ness from  a  new  viewpoint.  We  are  not  swayed  by 
sentiment.  We  are  untrammeled  by  routine  or  the 
customs  of  your  particular  line." 

The  last  point  is  probably  the  most  important.  Busi- 
ness has  long  been  hampered  by  tradition.  This  is  to 
be  expected  from  the  nature  of  its  development.  Even 
when  a  new  idea  is  established  in  one  branch  of  industry, 
the  man  in  another  almost  invariably  says:  "  My  busi- 
ness is  different;  that  idea  would  not  work  under  our 
conditions."  Between  buggies  and  men's  collars,  for 
example,  there  is  no  apparent  analogy.  Yet  the  man- 
ager of  a  vehicle  works  found  in  the  cutting  room  of  a 
collar  factory  a  refinement  in  method  which  saved  him 
thousands  of  dollars  when  applied  to  the  shaping  of  his 
leather  trimmings. 

His  cutters,  working  on  narrow  tables,  were  accus- 
tomed to  "  size  up  "  each  hide  as  they  unrolled  it,  then 
apply  their  patterns  to  a  section  of  it  and  slice  out  the 
pieces  needed.  Five  minutes'  study  of  the  collar  cut- 
ters led  the  manager  to  substitute  at  home  tables  wide 

20 


A  METHOD  OF  APPROACH 

enough  and  long  enough  to  accommodate  a  full  hide 
flat.  On  this  each  cutter  was  taught  to  shift  his  pat- 
terns about  until  every  possible  inch  of  leather  was  util- 
ized before  touching  knife  to  it.  The  time  required  to 
cut  up  a  hide  was  doubled  and  new  cutters  had  to  be 
employed;  but  more  than  half  the  saving  of  ten  thou- 
sand dollars  in  costly  raw  material  remained  to  be  added 
to  the  company's  net  profit.  All  because  a  manager 
with  an  open  mind  recognized  in  an  alien  industry  an 
operation  fundamentally  identical  with  one  of  his  own 
processes  and  forthwith  readjusted  his  viewpoint  on 
this  process. 

Other  instances  might  be  cited  of  the  value  of  a  new 
angle  of  vision  in  a  business.  The  rearrangement  of  an 
office,  suggested  by  a  subordinate,  saved  daily  for  his 
superior  half  a  mile  of  unnecessary  walking.  And  a 
casual  visitor  at  a  large  mail-order  house,  where  it  was 
thought  every  unnecessary  motion  had  been  eliminated, 
pointed  out  wasted  effort  in  the  order  department.  In 
filling  out  the  blanks,  the  notation  "  P.  O."  was  used  for 
post-office  money  orders,  "  E.  O."  for  express  orders, 
and  so  on.  Since  ninety  per  cent  of  the  30,000  remit- 
tances received  every  day  were  by  post-office  order, 
there  was  a  waste  represented  by  the  time  used  in  27,- 
000  unnecessary  notations.  By  tagging  only  the  3,000 
orders  on  which  remittances  were  made  in  some  other 
manner,  postal  orders  could  be  distinguished  without 
further  effort. 

The  adoption  of  a  new  point  of  view  was  the  starting- 
place  in  the  development  of  the  Taylor  system  of  shop 
management.  If  scientific  management  means  any- 
thing, it  means  an  entire  divorce  from  tradition.  Old 
methods  of  work  must  be  tested,  and,  if  found  lacking, 

21 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

must  be  replaced  by  a  standardized  operation  deter- 
mined upon  after  analysis  and  time-study  of  all  the 
motions  involved.  Scientific  management  may  be  noth- 
ing but  applied  common  sense,  as  some  of  its  critics 
have  declared.  It  is  important,  however,  because  it  is 
common  sense  applied  in  a  new  way. 
This  systematic  method  of  approach: 

(1)  Elimination  of  the  personal  equation, 

(2)  Separation  of  the  problem  into  its  constituent 
problems, 

(3)  Listing  of  the  factors  involved, 

(4)  Taking  of  a  new  point  of  view, 

is  not  intended  to  be  a  conscious  process.  Only  when  it 
has  become  habitual  to  the  user  is  it  most  effective.  A 
man  should  not  pause  in  the  process  of  thought  to  con- 
sider the  method  of  his  thinking.  But  when  a  problem 
is  complex  and  many  factors  are  involved,  the  formal 
use  of  this  method  may  be  of  benefit.  The  assembling 
in  written  form  of  the  constituent  questions  and  their 
chief  factors,  with  the  value  and  importance  of  each 
approximated,  should  at  least  clarify  the  situation  and 
increase  the  chances  of  a  satisfactory  solution. 


PART  I 
THE  PROBLEMS  OF  PRODUCTION 


CHAPTER  III 

LOCATION  OF  THE  PLANT 

rriHE  activities  of  production,  we  have  seen,  are  con- 
■*•  cerned  either  with  the  providing  of  a  ready-to-run 
factory,  its  location,  construction,  and  equipment;  or 
with  its  subsequent  operation,  the  processing  of  ma- 
terials through  the  agency  of  labor,  and  the  organization 
of  these  processes.  Before  taking  up  the  first  group  of 
plant  activities,  those  having  to  do  with  location,  let  me 
explain  that  what  follows  here  is  to  be  an  illustration  of 
a  definite  and  systematic  approach  to  business  problems 
rather  than  a  complete  analysis  of  the  conditions.  It 
would  not  be  in  accord  with  the  plan  of  this  book,  in- 
deed, to  attempt  anything  like  comprehensive  treat- 
ment of  a  subject  susceptible  of  so  many  combinations 
of  varying  influences. 

According  to  one  engineer,  there  are  twenty-six  fac- 
tors to  be  taken  into  account  in  selecting  a  location  for 
a  factory.  He  includes  with  major  items  like  access  to 
markets,  sources  of  materials,  and  supplies  of  labor, 
indirect  factors  which  contribute  to  the  satisfaction 
of  the  working  force,  like  climate  and  water,  schools 
and  churches,  housing  and  local  transportation,  parks, 
theatres,  and  other  community  attractions.  This  view 
may  seem  extreme,  almost  finical.  Contrasted  with 
the  usual  method  of  choosing  a  location,  however,  it 
emphasizes  the  importance  of  the  first  step  in  the  sug- 
gested method  of  approach  —  the  elimination,  or  at 

£5 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

least  the  recognition,  of  the  personal  equation  in  con- 
sidering your  problem. 

One  of  the  notable  large  factories  of  the  United  States 
supplies  a  negative  case  in  point.  In  plan,  arrangement, 
construction,  equipment,  and  working  conditions  this 
plant  could  hardly  be  improved  upon.  It  employs  sev- 
eral thousand  men  and  consumes  merchant  steel  and 
iron,  lumber,  coal,  and  other  supplies  by  the  train  load. 
For  many  years,  this  great  bulk  of  materials  had  to  be 
trucked  nearly  two  miles  from  the  city  freight  yards  to 
the  factory  and  the  product  in  turn  hauled  back  to  the 
freight  houses  for  shipment.  Recently,  after  a  long 
campaign  for  an  enabling  ordinance,  the  company  se- 
cured direct  railroad  connections  which  allow  delivery 
of  its  heavier  materials  in  the  factory  yards.  But  it  is 
still  obliged  to  maintain  a  fleet  of  nearly  forty  motor 
trucks  to  supplement  the  limited  railroad  service  which 
its  isolated  situation  permits. 

Going  back  to  the  origins  of  the  plant,  you  find  that 
the  personal  equation  entered  largely  into  its  location. 
Outgrowing  his  first  small  shop,  the  owner  —  whose 
commercial  foresight  in  many  other  respects  has  been 
remarkable  —  permitted  sentiment  and  convenience  to 
guide  his  selection  of  a  new  site.  The  second  factory 
was  erected  on  his  father's  farm,  remote  from  the  rail- 
roads and  because  of  its  topographical  surroundings 
difficult  to  reach  with  a  connecting  line.  Possession  of 
the  land  was  one  reason  for  this  choice;  but  family  pride 
and  fondness  for  the  neighborhood  were  admittedly  the 
compelling  motives.  Twenty -five  years  ago,  of  course, 
a  switch  track  was  not  considered  essential  to  a  factory ; 
while  the  most  active  imagination  might  have  failed  to 
conceive  the  need,  in  time,  of  forty  motor  trucks  as 

26 


LOCATION  OF  THE  PLANT 

traffic  attendants  on  the  little  new  plant  in  the  corn- 
field. 

Convenience  and  sentiment  still  control  in  the  placing 
of  countless  industries.  In  starting  a  business,  a  man 
ordinarily  selects  his  home  town  for  its  headquarters. 
From  the  viewpoint  of  finance,  his  first  market  and  the 
labor  supply,  choice  of  the  city  in  which  he  is  known 
and  commands  friendly  interest  is,  perhaps,  the  part  of 
wisdom.  Under  certain  conditions  —  limited  capital, 
for  instance  —  any  other  action  might  be  impossible ; 
but  here  the  personal  equation  would  not  actually  in- 
fluence the  decision.  Convenience  and  sentiment,  in- 
deed, have  more  to  do  with  the  location  of  plants  in 
particular  sections  of  the  city,  which  the  owners  prefer 
because  they  are  easy  to  reach  from  their  residences  or 
because  they  want  to  be  associated  in  the  public  mind 
with  the  districts  chosen.  To  indulge  such  groundless 
preferences  is  to  handicap  the  success  of  the  under- 
taking, just  as  mistaken  loyalty  to  his  native  town  or 
a  desire  to  live  in  a  certain  city  blinds  many  a  capable 
business  man  to  the  advantages  of  other  more  strategic 
centers. 

The  surest  way  to  overcome  the  personal  equation  is 
to  take  the  second  step  in  the  approach  already  outlined 
and  resolve  the  main  problem  into  its  constituent  prob- 
lems. Thus  the  suitability  of  any  factory  site  breaks 
up  into  a  number  of  unit  questions :  How  near  and  how 
accessible  is  the  market  for  your  product?  What  are 
the  transportation  facilities  and  rates,  and  the  chances 
of  alternative  service  during  car  shortages.''  What 
sources  of  materials  are  at  hand.^^  Under  what  control.'* 
What  will  materials  cost,  compared  with  costs  at  com- 
peting points?     Is  there  an  adequate  supply  of  labor 

27 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

of  the  kind  required  at  the  prices  you  can  pay?  Are 
local  conditions  such  as  will  help  or  hinder  in  the  secur- 
ing, retaining,  and  handling  of  the  working  force?  Will 
any  financial  advantages  accrue  from  location  at  this 
particular  point,  either  in  the  saving  of  capital  invested 
or  the  securing  of  outside  money  needed?  What  will 
an  adequate  and  satisfactory  site  cost? 

Will  the  type  of  construction  best  suited  to  the  present 
and  future  requirements  of  the  business  comply  with 
physical  and  legal  conditions?  Will  the  necessary  out- 
lay for  buildings  be  greater  or  less  than  at  other  avail- 
able locations?  Will  the  tax  rate  be  lower  or  higher? 
Will  the  situation  of  the  factory  add  to  the  fire  hazard 
and  the  insurance  rate?  Will  lighting  conditions  be  sat- 
isfactory? The  water  supply  adequate?  The  drainage 
and  other  facilities  for  disposal  of  wastes  suflBcient? 
Are  the  surroundings  likely  to  affect  manufacturing 
processes  or  the  comfort  or  health  of  employees  at  work? 
Will  the  plant  be  within  walking  distance  or  at  least  not 
diflficult  to  reach  from  the  homes  of  employees?  Will 
the  location  contribute  any  selling  or  advertising  value 
to  the  product?  Will  it  involve  any  excessive  legal 
limitations  on  the  activities  of  the  business?  Unusual 
circumstances  or  local  conditions  may  give  special  im- 
portance to  certain  factors  in  these  problems.  The 
drastic  provisions  of  employers'  liability  laws  in  New 
York  state,  for  instance,  have  trebled  the  former  cost  of 
casualty  insurance.  Compared  with  a  New  Jersey  or 
Connecticut  site,  the  other  advantages  of  which  were 
approximately  equal,  a  New  York  location  at  present 
might  be  a  poor  investment.  Yet  in  the  long  run  it 
might  provide  a  higher  type  of  laboring  force. 

The  splitting  up  of  the  main  problem  and  the  listing 

28 


LOCATION  OF  THE  PLANT 

of  the  factors  in  this  way  not  only  prevent  the  giving  of 
undue  weight  to  any  single  factor,  but  also  reduce  the 
analysis  of  competing  sites  to  something  like  a  math- 
ematical operation,  in  which  the  advantages  and  dis- 
advantages of  each  are  compared  with  those  of  the 
others. 

The  removal  of  a  silverware  plant  from  New  York 
City  to  a  Connecticut  factory  town  several  years  ago 
presented  a  typical  problem  in  location,  and  the  com- 
pany's method  of  approach  is  an  excellent  illustration 
of  just  such  an  analysis  and  assembling  of  the  signifi- 
cant factors  as  are  indicated  above. 

As  in  so  many  successful  industries,  the  original  fac- 
tory had  been  outgrown.  Looking  about  for  a  new  lo- 
cation, the  directors  found  that  all  available  New  York 
sites  had  one  drawback  in  common.  The  high  cost  of 
land  would  make  it  necessary  to  limit  the  ground  floor 
area  of  the  new  building  to  the  space  requirements  of 
the  power  plant,  the  shipping  rooms,  and  the  general 
offices.  Three  additional  floors  would  be  needed  for 
current  manufacturing  operations;  further  expansion  of 
the  business  must  be  taken  care  of  by  superimposing 
other  stories.  This  would  mean  the  probable  division 
of  one  important  department  between  two  floors  and 
would  certainly  not  conduce  to  economical  production. 
Elevator  service  for  the  transfer  of  stock  in  process  and 
workmen  from  floor  to  floor  would  increase  overhead 
expense;  inquiry  showed  that  in  some  cases  the  cost  of 
such  service,  including  repairs,  power,  operators,  and 
the  time  of  foremen  and  mechanics  using  it  amounted 
to  about  two  per  cent  of  the  total  pay  roll. 

Outside  New  York,  in  any  one  of  several  industrial 
towns,  the  same  investment  would  secure  a  site  large 

29 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

enough  to  permit  all  heavy  manufacturing  processes  to 
be  concentrated  on  the  ground  floor,  in  the  most  effec- 
tive sequence  and  with  the  minimum  of  trucking  for 
stock  and  of  movement  for  employees.  Construction, 
too,  could  be  of  a  much  cheaper  and  more  flexible  type 
in  a  two-story  detached  factory  in  the  country  than  in  a 
four,  six,  or  eight  story  structure  wedged  in  between 
buildings  in  a  city  district  where  the  fire  hazard  was 
great,  insurance  rates  correspondingly  high,  and  the 
city  building  ordinances  most  exacting.  Cheapness  and 
flexibility  in  construction  were  vital  considerations,  for 
the  reason  that  invention  of  new  machines  or  new  proc- 
esses might,  at  any  time,  necessitate  the  complete  re- 
arrangement of  one  or  many  departments.  Safety  and 
a  low  insurance  rate  were  matters  of  account;  so  also 
were  daylight  illumination  of  workrooms  and  freedom 
from  dust  and  soot.  On  all  these  items,  the  small  town 
site  was  greatly  to  be  preferred. 

Certain  advantages  were  inherent,  however,  in  a 
metropolitan  location.  New  York  offered  the  best  mar- 
ket for  raw  materials  and  supplies.  It  was  the  sales 
center  of  the  silverware  trade;  during  the  seasons  when 
customers  came  in  to  buy,  quick  and  easy  access  to  the 
plant  and  the  general  offices  had  a  definite  selling  in- 
fluence on  visitors.  Direct  trucking  communication 
between  factory  and  salesrooms  allowed  of  closer  co- 
operation in  filling  orders  and  considerable  economies 
in  the  handling  and  refinishing  of  goods.  As  a  shipping 
center,  also.  New  York  was  beyond  comparison.  Ninety 
per  cent  of  the  company's  forwarding  was  done  by  ex- 
press. New  York  offered  a  choice  of  several  carriers  and 
direct,  immediate  dispatch  in  the  case  of  rush  orders; 
while  service  in  the  smaller  town  might  be  limited  to  a 

30 


LOCATION  OF  THE  PLANT 

single  express  company  and  be  delayed  by  the  necessity 
of  transfer  at  New  York.  Still,  the  almost  prohibitive 
cost  of  a  city  site  or  the  alternative  drawbacks  in  con- 
struction, arrangement,  and  operation  determined  the 
directors  to  canvass  the  small  towns  thoroughly  before 
settling  the  question. 

The  problem  finally  narrowed  down  to  choice  between 
a  New  York  location  and  one  in  a  particular  industrial 
center  in  Connecticut.  Half  a  dozen  other  cities  in 
Connecticut,  New  York,  and  New  Jersey  —  all  wuthin 
a  radius  of  fifty  miles  —  were  considered.  Sites  at  a 
greater  distance  were  eliminated  because  nothing  they 
had  to  offer  would  compensate  for  the  added  difficulty 
in  reaching  them.  Customer-visits  to  the  plants,  it  was 
decided,  could  not  be  jeopardized  by  making  the  jour- 
ney long  and  tiresome.  For  analogous  reasons,  various 
smaller  towns  were  dismissed  because  hotel  accommo- 
dations were  lacking  and  train  service,  both  for  passen- 
gers and  express  shipments,  not  so  good.  In  addition 
to  the  railroad  facilities  of  the  town  finally  selected, 
three  steamboat  lines  to  New  York  City  provided  cer- 
tain assurance  against  delays  and  made  a  complete  tie- 
up  of  communication  practically  impossible.  This  last 
consideration  illustrates  the  interdependence  of  produc- 
tion problems  and  problems  of  distribution  (already 
discussed  in  the  first  chapter)  and  the  necessity  of  fore- 
seeing the  influence  of  each  upon  the  other. 

Besides  the  typical  small-city  advantages  as  an  in- 
dustrial site,  the  chosen  town  possessed  other  attractive 
features.  The  prices  of  gas  and  water  were  below  the 
average.  There  would  be  a  substantial  saving  in  taxes 
for  two  reasons,  the  rate  was  lower  and  the  real  estate 
investment  would  be  much  less  than  in  New  York. 

31 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

Power  could  be  produced  more  cheaply  than  in  New 
York.  The  water  freight  on  steam  coal  from  the  West 
Virginia  fields  was  nine  cents  higher  than  to  New  York, 
but  this  excess  would  be  more  than  made  up  by  the 
saving  in  trucking  charges  from  dock  side  to  boiler 
room  and  in  disposal  of  the  ashes.  The  saving,  in  fact, 
would  amount  to  nearly  seventy -five  cents  a  ton  on  all 
coal  burned,  in  itself  a  considerable  economy. 

Conditions  were  favorable  also  to  the  easy  handling 
of  labor.  The  company  wanted  to  carry  with  it  to  the 
new  factory  all  its  skilled  men  and  many  of  its  unskilled. 
City-bred  mechanics,  however,  frequently  have  a  dis- 
taste for  life  in  a  small  town.  The  employees  of  one 
large  manufacturer  recently  voted  against  removal  of 
the  plant  from  a  city  noted  for  its  parks,  beaches,  and 
public  institutions,  insisting  that  they  could  get  more 
pleasure  and  relaxation  for  nothing  where  they  were 
than  they  could  buy  with  a  week's  wages  in  the  other 
town.  The  silverware  company,  on  the  contrary,  was 
able  to  present  its  new  site  as  a  better  place  in  which  to 
live  and  bring  up  families.  Its  nearness  to  New  York 
would  enable  them  quickly  and  cheaply  to  run  into  the 
city  whenever  they  desired,  thus  maintaining  such  con- 
nections and  associations  as  they  valued.  The  available 
sites  for  the  new  plant  were  within  walking  distance  of 
districts  where  desirable  homes  could  be  bought  or 
rented  at  figures  much  below  the  New  York  levels  for 
corresponding  environments.  The  saving  in  time  spent 
in  crowded  street  cars  would  be  at  least  an  hour  daily 
for  each  workman,  to  say  nothing  of  the  carfare.  As 
for  schools,  churches,  parks,  bathing  beaches,  and  other 
accessible  community  utilities,  New  York  offered  noth- 
ing more.   Even  working  conditions  would  be  bettered 

32, 


LOCATION  OF  THE  PLANT 

by  the  removal  to  a  place  where  daylight  and  fresh  air 
were  abundant. 

Thus,  item  by  item,  the  company  assembled  all  the 
factors  bearing  on  its  location  problems.  Certain  of 
these,  of  possible  prime  importance  to  a  young  business 
with  limited  resources,  could  be  disregarded.  For  ex- 
ample, no  question  of  capital  or  finance  had  to  be  con- 
sidered. The  company  was  able  to  pay  any  reasonable 
sum  for  a  site,  could  erect  and  equip  a  factory  without 
outside  aid.  Banking  facilities  were  a  minor  item,  since 
New  York  connections  could  be  maintained.  Sources 
and  prices  of  raw  materials  would  not  be  affected.  And 
so  with  other  factors  not  analyzed  above  and  ranged  as 
favoring  or  discouraging  removal,  they  could  practically 
be  ignored.  And  having  brought  together  all  the  ele- 
ments that  counted,  'pro  or  con,  and  balanced  them  in 
accord  with  their  relative  values,  the  Connecticut  town 
was  decided  upon  as  the  place  for  its  new  factory. 

In  coming  to  this  decision,  the  company  consciously 
or  unconsciously  illustrated  the  final  step  in  the  method 
I  have  suggested  for  approaching  business  problems  — 
the  taking  of  a  fresh  point  of  view.  It  has  been  made 
clear,  I  think,  that  they  attacked  the  question  of  loca- 
tion as  a  new  problem,  surveying  all  the  conditions  and 
circumstances  without  bias  of  any  sort,  either  personal 
prejudice  or  regard  for  trade  customs  or  traditions.  It 
is  the  usual  thing,  for  example,  to  locate  new  mills  in 
districts  where  successful  mills  of  the  same  class  or 
character  are  in  operation.  In  a  particular  case,  it  is 
quite  possible  that  this  customary  procedure  is  the  right 
one  to  follow;  again  there  may  be  found  reasons  for  an 
opposite  course.  These  reasons,  however,  can  be  de- 
veloped only  by  assuming  a  viewpoint  independent  of 

33 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

traditions.  As  in  the  case  of  this  silverware  company, 
all  the  conditions  which  make  for  failure  or  success 
should  be  observed  and  carefully  analyzed  from  the 
standpoint  of  a  new  enterprise.  Nothing  should  be 
taken  for  granted. 

Certain  general  advantages,  to  be  sure,  reside  in  a 
location  where  other  factories  in  the  same  line  or  al- 
lied lines  are  concentrated  —  as  shoe  making  in  Lynn, 
Brockton,  and  St.  Louis;  flour  milling  at  Minneapolis 
and  St.  Paul,  and  cotton  manufacturing  at  Fall  River 
and  New  Bedford.  In  such  centers,  each  individual 
industry,  because  of  the  importance  of  its  group,  com- 
mands resources  and  service,  and  profits  by  various 
external  economies  which  the  isolated  establishment 
is  likely  to  miss.  At  Detroit,  for  instance,  where  the 
production  of  motor  cars  is  carried  on  extensively,  sub- 
sidiary factories  have  multiplied  and  now  supply  eco- 
nomically and  without  delay  the  special  machinery  and 
tools,  the  specialized  parts,  materials,  accessories,  and 
supplies  which  the  parent  industry  requires.  The  mag- 
nitude of  the  market  open  for  these  specialized  prod- 
ucts tempts  initiative  and  ingenuity  to  undertake  detail 
manufacturing  tasks  which  the  maker  of  motor  cars 
prefers  not  to  assume  himself,  and  thus  brings  about  a 
cooperative  effort  profitable  to  everybody. 

For  like  reasons,  purchasing  conditions  are  more 
favorable  at  the  focus  of  an  industry;  prices  are  closer, 
quality  of  deliveries  is  more  carefully  watched,  and  de- 
liveries themselves  are  more  apt  to  be  on  schedule. 
Bankers,  too,  have  studied  underlying  conditions  more 
intensively  and  the  sound  enterprise  is  more  easily 
financed.  Public  opinion  is  usually  more  favorable  to 
the  basic  community  industry  in  which  a  large  number 

34 


LOCATION  OF  THE  PLANT 

of  citizens  are  interested.  And  finally,  where  many- 
minds  are  directed  upon  the  same  technical  problems 
and  there  is  interchange  of  information,  both  privately 
and  through  trade  association  channels,  advances  in 
production  practice  are  more  frequent  and  more  quickly 
shared. 

Where  the  factories  gather,  also,  labor  congregates. 
Mechanics  of  the  highest  skill  or  specialized  training 
avoid  the  isolated  plant  for  definite  reasons.  If  a  dull 
selling  season  brings  about  a  shut-down  or  half-time  pro- 
duction, the  chance  of  employment  elsewhere  is  small; 
while  a  disagreement  with  a  foreman  nearly  always 
means  removal  to  some  other  city.  So  general  is  this 
feeling  against  the  factory  at  a  distance  from  the  greater 
labor  markets,  that  even  the  most  stable  of  businesses, 
when  situated  thus,  find  it  hard  to  induce  skilled  labor 
to  join  their  forces.  One  specialty  company  in  Ohio, 
for  example,  when  redesign  of  its  machine  tools  was 
determined  upon  and  twenty  additional  tool-makers 
were  needed,  paid  an  average  of  $180  each  to  start  the 
new  men  at  work.  Most  of  these  had  families,  and 
their  moving  expenses  were  paid  on  the  theory  that  the 
families  would  help  to  anchor  them  to  their  new  jobs. 
In  line  with  this  belief  is  the  experience  of  a  plant  su- 
perintendent in  central  Illinois  who  is  content  if  he 
can  keep  unmarried  operators  of  screw  machines  three 
months  before  they  make  their  next  jump  to  St.  Louis 
or  Chicago.  In  an  isolated  plant  like  this,  the  loss  of 
a  few  skilled  workmen  in  a  processing  department  might 
cripple  production  until  they  could  be  replaced. 

Unskilled  labor  —  no  less  a  necessity  of  large-scale 
production  —  has  a  similar  tendency  to  concentrate  in 
the  big  communities,  particularly  since  so  many  of  our 

3d 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

pick-and-shovel  men  have  been  recruited  from  southern 
and  eastern  Europe.  As  a  result  of  this  common  drift 
on  the  part  of  both  skilled  and  unskilled,  our  cities  have 
become  huge  labor  markets  from  which  any  number  of 
extra  workers  of  well  nigh  any  class  can  be  drawn  when 
needed.  So  long  as  an  industry  is  given  to  decided  fluc- 
tuations in  sales  and  output,  it  needs  such  a  dependable 
labor  pool.  Hence  we  witness  the  building  up  of  manu- 
facturing districts  like  that  surrounding  the  Baldwin 
locomotive  works  in  Philadelphia,  whose  scores  of  ma- 
chinery houses  have  taken  care  of  business  expansion  by 
adding  upper  stories  to  their  plants,  and  sacrificed  a 
certain  amount  of  everyday  efficiency  in  order  to  insure 
a  flexible  labor  supply. 

These  are  all  general  advantages,  however,  and  should 
not  be  emphasized  to  the  exclusion  of  possible  special 
benefits  which,  in  a  particular  case,  might  balance  or 
outweigh  them.  Nearness  to  supplies  of  raw  materials 
and  cheap  labor,  for  instance,  have  made  it  possible 
for  southern  cotton  mills  to  compete  favorably  with 
New  England  establishments,  especially  on  the  coarser 
fabrics.  This,  despite  New  England's  better  transpor- 
tation, lower  freight  rates,  cheaper  power,  highly  organ- 
ized markets,  and  notable  concentration  of  the  industry, 
with  its  attendant  advantages.  It  must  also  be  taken 
into  account  that  in  mdustrial  centers,  skilled  and  com- 
mon labor  are  both  likely  to  carry  organized  effort  to 
limit  production  and  enforce  relatively  high  wage  scales 
much  further  than  in  communities  where  class  con- 
sciousness has  not  been  fostered. 

For  the  sake  of  showing  how  definite,  almost  arith- 
metical, the  approach  to  a  business  problem  can  be 
made,  the  steps  in  the  location  of  a  drain  tile  factory  in 

36 


LOCATION  OF  THE  PLANT 

the  Middle  West  some  years  ago  may  be  recounted  here. 
The  owners  made  nearness  to  market  their  first  consid- 
eration, though  the  other  salient  factors  were  not  over- 
looked. Their  product  would  be  bulky  and  of  low  value 
relative  to  weight;  the  plant  with  the  shortest  haul 
would  enjoy  a  real  selling  advantage  in  its  lower  freight 
rates.  The  plant  was  located,  therefore,  near  the  center 
of  a  district  where  land  levels  were  low  and  drain  tile  in 
constant  demand ;  the  extra  cost  and  added  risk  in  proc- 
essing the  inferior  raw  materials  found  there  were  ac- 
cepted for  the  sake  of  the  advantage  in  transportation. 
As  the  customer  paid  the  freight,  the  saving  appealed 
directly  to  his  pocket.  The  new  company  did  not  need 
to  cut  prices  and  thus  provoke  disparagement  of  its 
product,  while  the  difference  in  rates  emphasized  its 
character  as  a  "  home  "  industry. 

There  was  also  a  plentiful  supply  of  native  labor,  with 
sufficient  intelligence  to  master  quickly  all  but  the  most 
technical  processes  of  manufacture.  \Mien  the  balance 
was  struck,  the  new  location  scored  on  four  principal 
counts  —  transportation,  two  points;  labor,  one  point; 
finance,  one  point  (a  free  site  was  offered  and  additional 
deposits  of  raw  materials  could  be  purchased  cheaply) ; 
advertising  and  selling,  one  half  point.  Against  these, 
three  disadvantages  appeared:  banking  facilities  were 
limited,  subtracting  one  point;  material  was  inferior, 
one  half  point;  and  sources  of  fuel  were  distant,  increas- 
ing the  cost  and  deducting  another  half  point.  The  net 
result  was  a  count  of  four  and  one  half  points  to  two  in 
favor  of  the  central  situation. 

The  problem  of  plant  location,  however,  does  not  stop 
with  the  selection  of  a  particular  city.  The  actual  plac- 
ing of  the  factory  to  satisfy  and  make  the  most  of  local 

37 

/   :^   *    i  H 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

and  internal  conditions  is  a  matter  which  can  be  settled 
only  by  the  same  process  of  careful  analysis  and  weigh- 
ing of  essential  factors.  Where  in  the  general  district 
(the  traffic  zone  surrounding  a  large  city,  for  instance, 
its  boundaries  marked  by  the  area  to  which  the  city 
freight  tariffs  apply)  is  the  plant  to  be  built?  What 
section  of  the  chosen  town  is  most  suitable? 

Here  enter  many  of  the  factors  which  we  found  impor- 
tant in  determining  the  main  problem:  transportation 
(direct  railroad  connections),  power  (no  neighborhood 
restrictions  on  its  production),  labor  (accessibility  from 
residence  districts  and  freedom  from  objectionable 
conditions),  advertising  and  selling  values,  and  so  on. 
The  physical  characteristics  of  competing  sites  must 
also  be  examined.  Can  suitable  foundations,  for  ex- 
ample, be  secured  at  average  cost?  What  is  the  slope 
of  the  ground?  Can  this  slope  be  used  in  planning  the 
layout  of  the  buildings?  How  does  it  affect  drainage  or 
the  water  supply?  Will  the  excavation  furnish  mate- 
rials for  construction,  as  gravel  or  sand  in  a  building  of 
reinforced  concrete? 

In  the  local  placing  of  the  drain  tile  plant  just  men- 
tioned, transportation  again  governed.  The  shale  beds 
and  free  site  lay  some  distance  from  the  village,  along- 
side one  railroad  but  a  mile  and  a  half  from  its  junction 
with  another  road.  To  build  here  would  require  no 
investment  in  a  site,  while  the  material  could  be  de- 
livered to  the  machines  at  minimum  cost.  The  draw- 
back would  be  the  lack  of  connections  with  the  other 
railroad.  Many  shipments  which  might  secure  com- 
petitive service  and  rates  if  both  carriers  were  accessible 
would  get  only  routine  attention  at  the  maximum  rate. 
Every  car  shortage  might  result  in  serious  delays  and 

38 


LOCATION  OF  THE  PLANT 

possible  cancellation  of  contracts.  To  insure  certainty 
in  deliveries,  therefore,  the  management  paid  fifteen 
hundred  dollars  for  three  acres  at  the  junction  and 
erected  its  plant  there,  preferring  to  pay  freight  on  its 
material  rather  than  save  at  the  possible  expense  of  sales. 
Some  weight  was  attached  also  to  proximity  to  the  vil- 
lage; workmen  would  have  a  mile  less  to  walk  mornings 
and  evenings  and  could  go  home  to  their  noonday  din- 
ners. The  decisive  factor,  however,  was  transportation 
facilities  and  service  in  this  instance,  just  as  the  lower 
cost  of  shorter  hauls  had  been  the  determining  cause  in 
locating  the  plant  in  its  geographical  relation  to  the 
market. 

At  the  risk  of  appearing  prolix,  analysis  of  the  prob- 
lem of  location  has  been  carried  out  at  some  length  in 
this  chapter,  first  in  order  to  indicate  with  quantities 
having  standard  and  recognized  values  the  scheme  of 
analysis  which  later  will  be  applied  to  the  less  familiar 
activities  of  distribution  and  administration,  and  also  to 
illustrate  how  a  systematic  approach  will  facilitate  the 
determination  of  any  business  question.  In  succeeding 
chapters,  the  effort  will  be  made  to  sketch  rather  than  to 
develop  the  outlines  of  each  problem  and  the  factors 
affecting  its  solution. 


CHAPTER  IV 
CONSTRUCTION  AND  EQUIPMENT  OF  THE  PLANT 

IN  the  construction  of  a  factory  the  main  considera- 
tion, of  course,  is  its  efficiency  as  a  producing  unit. 
Size,  type,  shape,  arrangement,  cost,  number  of  stories, 
and  other  physical  characteristics  are  essential  factors 
in  achieving  this  result.  The  determination  of  each, 
therefore,  is  a  problem  to  be  solved  by  the  unbiased  and 
systematic  approach  illustrated  in  the  preceding  chap- 
ter on  location.  In  their  broad  aspects,  indeed,  location 
and  construction,  as  well  as  equipment,  are  parallel  and 
interdependent  problems. 

The  best  site  for  a  plant  (within  the  district  which  sat- 
isfies material,  labor,  transportation,  and  other  primary 
requirements)  is  that  tract  of  land  which  lends  itself  to 
the  erection  of  the  particular  kind  of  building  or  group  of 
buildings  in  which  the  processes  of  manufacture  can  be 
carried  on  most  effectively.  Conversely,  any  plant  falls 
short  of  its  highest  efficiency  unless,  in  its  planning  and 
building,  advantage  has  been  taken  of  every  favorable 
feature  of  the  site.  And  neither  the  location  nor  the 
construction  can  be  intelligently  or  profitably  considered 
apart  from  the  equipment  which  is  to  be  accommodated. 
In  general,  it  would  be  better,  from  the  standpoint  of 
efficiency,  to  plan  and  erect  the  building  around  the 
equipment  than  to  arrange  the  machinery  after  the 
building  was  completed. 

Preliminary  to  the  analysis  and  balancing  of  fac- 

40 


CONSTRUCTION  AND  EQUIPMENT 

tors,  merely  personal  considerations  must  again  be  dis- 
counted. The  owner's  preference  for  a  special  type  of 
building  or  a  certain  kind  of  construction  must  be  elim- 
inated unless  the  preference  rests  on  practical  engineer- 
ing or  commercial  grounds.  He  may  fancy  his  business 
housed  in  one  of  the  imposing  ivy-covered  buildings 
which  are  pictured  at  intervals  in  the  magazines;  but 
if  his  product  can  be  turned  out  more  economically  in  a 
sprawling,  one-story  plant  with  a  saw-tooth  roof,  he  will 
do  well  to  dismiss  his  day  dream.  The  selection,  corre- 
lation, and  placing  of  the  equipment  are  the  things  that 
count  in  starting  a  factory;  and  the  plan,  appearance, 
and  construction  of  the  building  should  all  be  subor- 
dinated to  the  eflSciency  of  the  machines. 

This  does  not  mean  that  the  structure  should  be  an 
eyesore;  a  pleasing  exterior  or  unusual  interior  finish 
may  possess  considerable  publicity  value  for  a  product 
with  quality  of  cleanliness  as  a  sales  argument,  to  say 
nothing  of  the  effect  of  clean  and  cheerful  surroundings 
on  the  working  force.  The  point  to  be  observed  in  this 
connection  is  that  eflficiency  of  operation  should  not  be 
sacrificed  to  satisfy  a  personal  whim  or  prejudice. 

When  we  come  to  break  up  the  problem  of  design  and 
construction  into  its  constituent  problems,  we  find  our- 
selves concerned  with  three  primary  questions:  What 
type  shall  our  building  be  —  single-story  or  multi-story, 
oblong,  hollow  square,  or  some  other  standard  shape.'* 
What  character  of  construction  shall  be  adopted  —  fire- 
resisting  or  slow-burning,  brick  and  steel,  concrete  or 
mill  construction?  What  financial  considerations  are 
involved  —  initial  cost  and  upkeep?  As  in  every  re- 
lated group  of  business  problems,  we  find  the  principle 
of  interdependence  in  control,  making  it  impossible  to 

41 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

find  the  right  answer  for  anyone  without  taking  the 
influence  of  the  others  into  consideration. 

The  type  of  building  to  be  erected  (or  purchased,  as 
it  is  frequently  profitable  to  do)  should  be  dictated  first 
by  the  character  and  sequence  of  the  manufacturing 
processes  to  be  sheltered.  Where  the  parts  have  great 
weight  and  bulk,  as  in  a  plant  producing  heavy-duty 
steam  engines  or  mining  machinery,  the  single-story 
building  appears  to  be  the  most  practical  type.  Where 
the  raw  materials  can  be  elevated  in  the  first  place  to 
the  top  floor  and  the  successive  operations  applied  to 
them  as  they  move  onward  and  downward,  as  in  the 
making  of  men's  hats,  the  building  of  several  stories 
suggests  itself  as  more  economical.  In  such  a  plant  a 
gravity-conveyor  system  is  often  used  for  the  transpor- 
tation of  materials  in  process. 

Where  the  product  is  an  assembly  of  many  relatively 
small  parts,  such  as  a  sewing  machine,  an  electric  fan,  or 
a  motor  car,  the  type  of  building  is  of  less  importance  if 
the  routing  of  materials  can  be  arranged  so  that  all  the 
processing  departments  feed  without  lost  motion  or 
interference  toward  a  central  assembling  room  or  stock 
room.  A  simple  rectangular  building,  of  one  story  or 
many  stories,  may  prove  a  satisfactory  type.  Or  when 
several  classes  of  raw  materials,  such  as  lumber,  pig 
iron,  sheet  steel,  and  brass  enter  into  the  make-up  of  the 
final  product,  a  building  with  projecting  wings  to  allow 
separate  but  synchronous  processing  of  these  materials 
may  be  chosen.  The  same  type  is  likely  to  prove  best 
for  a  business  making  a  line  of  goods  diverse  in  nature. 
Or  these  wings  may  be  developed  into  unit  buildings  to 
accommodate  wood-working,  foundry,  machining,  and 
other  special  operations.    In  factories  of  any  size,  in- 

4S 


CONSTRUCTION  AND  EQUIPMENT 

deed,  the  best  practice  gives  the  foundry  and  wood- 
working departments  buildings  of  their  own  for  much 
the  same  reasons  that  make  the  power  house  a  separate 
unit. 

Apart  from  the  relative  cost  of  single-story  and  mul- 
tiple-story buildings,  transportation,  arrangement  of 
equipment,  and  providing  of  sunlight  illumination  for 
the  greatest  number  of  operations  possible  are  the  chief 
considerations  in  determining  between  the  types,  except 
where  the  heavy  character  of  the  parts  produced  dic- 
tates choice  of  the  first.  Here  transportation  is  clearly 
the  prohibiting  cause;  even  in  factories  without  this 
limitation,  the  high  cost  of  handling  parts  from  floor  to 
floor  as  compared  with  horizontal  trucking  is  an  impres- 
sive item.  One  production  engineer,  after  time  studies 
of  the  trucking  and  elevator  service  in  a  table  factory, 
discovered  that  the  horizontal  time  equivalent  of  an 
elevator  trip  to  the  second  story  and  return  was  one 
hundred  feet,  with  an  additional  fifty  feet  on  the  level 
for  every  extra  story. 

For  daylight  illumination,  the  saw-tooth  roof  gives 
the  one-story  building  indefinite  powers  of  expansion, 
subject  only  to  the  maximum  floor  spaces  allowed  in  one 
inclosure  by  the  rules  of  the  insurance  underwriters.  In 
any  multi-story  structure,  on  the  contrary,  the  effective 
widths  range  from  fifty  to  seventy  feet,  dependent  on 
the  height  of  the  ceilings  and  the  proportional  area  of 
windows.  There  are  thousands  of  factories,  it  is  true, 
which  ignore  these  standards;  and  other  thousands 
which  accept  artificial  light  as  a  necessary  accompani- 
ment of  production,  even  in  country  situations.  But 
it  is  equally  true  that  the  most  efficient  modern  plants 
conform  to  them  and  rank  perfect  daylight  illumination 

43 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

of  work  practically  as  inflexible  a  rule  in  construction  as 
solid  foundations  or  a  non-leaking  roof.  Some  of  them 
concentrate  on  the  top  floors  the  operations  involving 
very  small  parts,  even  providing  saw-tooth  roofs  with 
northern  exposure  as  insurance  against  eye  strain  for 
workers  and  spoiled  parts  for  the  scrap  bins. 

There  is  another  motive  for  adopting  that  standard 
type  and  size  which  satisfies  your  production  require- 
ments. Not  only  is  such  a  building  less  costly  to  erect, 
because  it  utilizes  materials  of  standard  market  specifi- 
cations and  because  contractors  are  familiar  with  such 
construction,  but  it  will  also  be  more  salable  in  an  emer- 
gency or  in  the  event  that  removal  proves  desirable. 

For  the  same  reason,  the  more  closely  its  layout  con- 
forms to  standard  practice,  the  simpler  will  be  the  task 
of  selling  it.  To  be  easily  disposed  of,  a  plant  of  any 
size  must  have  a  railroad  siding  at  its  shipping  platform. 
Even  though  his  business  is  of  a  kind  that  has  little  use 
for  direct  rail  connections,  a  prospective  buyer  will  not 
offer  so  much  for  a  building  without  a  rail  outlet.  There 
are  many  exceptions  to  this  rule,  of  course,  and  any 
number  of  cases  where  a  switch  track  would  add  to  the 
cost  of  the  site  more  than  its  use  would  justify.  The 
damage  a  millinery  house  would  suffer  in  its  stock,  for 
instance,  would  wipe  out  any  saving  in  trucking  its 
light-weight  materials.  Any  light  manufacturing  busi- 
ness, unless  on  an  unusual  scale,  could  well  avoid  the 
extra  investment  a  switch  track  would  demand  and  use 
the  money  for  developing  a  wider  market. 

This  factor  of  salability  should  also  be  considered  in 
the  problem  of  design  and  construction.  It  should  not 
be  the  major  consideration,  but  rather  the  corrective 
measure  which  brought  up  or  down  to  recognized  stand- 

44 


CONSTRUCTION  AND  EQUIPMENT 

ards  the  specifications  which  might  otherwise  result  in 
a  building  costly  beyond  any  reasonable  need,  or  too 
light  in  design  for  any  use  except  that  for  which  it  was 
erected.  Both  are  extremes  to  be  avoided  in  fireproof  or 
mill  construction;  when  the  structure  is  of  concrete, 
however,  the  added  value  of  floors  capable  of  sustaining 
maximum  loads  is  out  of  proportion  to  the  slight  extra 
cost.  Here,  bringing  construction  up  to  recognized  levels 
of  strength  also  insures  the  future  of  the  business.  Even 
in  light  manufacturing,  methods  and  processes  are  con- 
stantly changing.  To  keep  pace  with  possible  develop- 
ments in  machinery,  the  factory  may  require  all  the 
margin  of  safety  its  floors  possess. 

More  important  factors  in  determining  the  character 
of  construction  are  the  legal  requirements  of  the  com- 
munity in  which  the  plant  is  located  (particularly  as 
these  bear  on  the  degree  of  fire  resistance  demanded) 
and  the  classes  of  material  available,  with  the  relative 
market  price  and  the  comparative  cost  of  handling  each 
kind.  Financial  considerations  must  be  taken  into 
account  as  well,  since  the  initial  cost  and  the  upkeep  of 
various  classes  of  buildings  vary  in  inverse  ratio. 

For  the  business  with  large  resources  and  long  experi- 
ence, the  problem  narrows  down  to  choice  between 
different  kinds  of  substantial  firepoof  or  slow-burning 
construction.  This  is  not  alone  to  keep  down  insurance 
premiums  and  repairs,  but  also  to  provide  against  pos- 
sible destruction  of  factory  and  machinery  at  the  height 
of  a  selling  season.  The  owner  or  manager  of  a  young 
business,  on  the  contrary,  usually  has  a  minimum  cap- 
ital to  work  with  and  must  figure  plant  investment 
down  to  the  lowest  point.  Frequently  he  starts  in  rented 
quarters  none  too  well  adapted  to  his  purposes  and  buys 

45 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

his  power  from  an  outside  source  at  a  higher  price  to 
avoid  the  installation  of  a  power  plant.  In  the  main, 
however,  these  problems  of  design,  construction,  initial 
cost,  and  upkeep  are  technical  questions  which  must  be 
settled  in  individual  cases  after  consultation  with  a  fac- 
tory engineer  or  architect  and,  perhaps,  with  a  building 
contractor.  There  are  too  many  possible  combina- 
tions of  conditions  to  be  analyzed  or  even  enumerated 
here. 

The  technical  expert  should  have  a  part,  too,  in  the 
next  step,  the  assembling  and  weighing  of  all  the  factors 
that  count  in  construction  of  this  individual  factory. 
The  tendency  of  the  architect  or  engineer  to  lay  stress 
on  the  technical  aspects  of  building  must  be  corrected 
by  the  practical  viewpoint  of  the  owner  or  manager. 
An  enthusiasm  for  some  special  type  of  construction, 
for  instance,  may  cause  the  architect  to  overlook  the 
peculiar  advantages  of  another  and  contrasting  type 
for  the  particular  industry  under  the  special  set  of  con- 
ditions which  may  exist.  Here  the  experience  and  the 
broader  perspective  of  the  manager  come  in  to  reduce 
each  factor,  technical  and  practical,  to  its  relative  pro- 
portions and  to  strike  a  balance  between  these  opposing 
but  interdependent  elements.  ^^ 

A  good  architect  and  a  competent  production  engineer 
are  quite  capable  of  providing  an  ideal  factory  and  an 
ideal  layout  for  almost  any  given  industry.  But  a  going 
business  nearly  always  has  an  individuality,  organiza- 
tion habits,  and  special  demands  which  must  be  consid- 
ered if  the  new  building  is  to  fit  its  needs  and  hamper 
none  of  its  activities.  The  owner  or  executive,  there- 
fore, can  depend  upon  his  technical  advisers  or  aids  for 
the  suggestion  and  carrying  out  of  technical  details;  but 

46 


CONSTRUCTION  AND  EQUIPMENT 

the  relative  weight  to  be  given  each  of  the  general  fac- 
tors must  be  determined  primarily  by  the  management. 

Here  the  fresh  point  of  view  has  great  value.  The 
fact  that  certain  types  of  buildings  and  certain  kinds 
of  construction  have  become  standards  in  your  district 
or  your  line  of  industry  is  not  a  guarantee  that  either  is 
the  one  best  suited  to  your  purpose.  Conformity  to 
this  standard  will  make  for  salability,  but  may  at  the 
same  time  seriously  affect  the  efficiency  of  production. 

The  furniture  factories  at  Grand  Rapids,  for  example, 
usually  have  been  of  mill  construction,  with  walls  of 
white  brick  and  only  the  usual  quota  of  windows  for 
lighting.  A  seasoned  furniture  man,  if  he  were  erecting 
a  new  building,  might  incline  to  this  traditional  type, 
but  a  man  whose  experience  had  been  in  a  machinery 
or  automobile  plant,  if  he  entered  the  furniture  field, 
would  be  likely  to  build  a  factory  with  windows  as  wide 
and  high  as  his  walls  would  permit,  using  the  steel  or 
concrete  construction  with  which  he  was  familiar  to 
balance  the  extra  fire  hazard  caused  by  his  raw  ma- 
terials. The  furniture  man,  before  he  decided  what 
type  his  new  building  should  be,  probably  would  profit 
by  advising  with  construction  specialists  and  visiting 
modern  machinery  and  motor-car  factories. 

The  importance  of  the  fresh  point  of  view  in  construc- 
tion is  suggested  by  the  experience  of  a  New  England 
weaving  mill  which  replaced  a  three-story  building  hav- 
ing a  width  of  seventy  feet  with  a  one-story  structure 
one  hundred  and  five  feet  wide  and  covered  with  a  saw- 
tooth roof.  The  improved  natural  lighting  and  increased 
facility  in  handling  materials  and  product  brought  about 
the  remarkable  reduction  of  one  half  in  the  cost  of  weav- 
ing and  two  thirds  in  the  cost  of  artificial  light. 

47 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

The  foundry  of  a  Detroit  stove  works  affords  another 
striking  illustration.  Indifferent  lighting  and  foul  air 
are  usually  accepted  as  necessities  of  foundry  operation; 
working  conditions  are  generally  worse  than  in  any  other 
processing  department.  This  stove  company,  however, 
determined  to  erect  a  foundry  which  would  eliminate 
discomfort  and  disorder.  Except  for  a  six-foot  base  of 
brick,  the  walls  are  entirely  of  steel  sash  and  glass.  By 
opening  tilting  sections  of  these  walls,  it  is  possible  to 
provide  satisfactory  ventilation  in  summer  and  to  clear 
the  building  of  vitiated  air  within  fifteen  minutes  after 
each  pouring  of  metal.  In  contrast  with  this  departure, 
which  allows  resumption  of  work  after  a  short  delay, 
many  foundries  plan  only  two  pourings  a  day  and  turn 
their  men  out  when  these  have  been  completed,  with 
mutual  loss  of  time  and  output.  As  foundry  capacity 
in  a  stove  works  sets  a  limit  for  the  whole  plant,  the 
value  of  the  fresh  viewpoint  is  indicated  by  the  effect 
on  production. 

Like  all  other  business  problems,  the  problems  of  con- 
struction cannot  be  solved  without  taking  into  account 
the  principle  of  interdependence  and  the  principle  of 
balance.  The  geographical  location  of  the  plant  and 
the  actual  site  have  much  to  do  with  choice  of  building 
materials  and  the  kind  of  construction  adopted.  The 
type  of  building,  on  the  other  hand,  cannot  be  intelli- 
gently determined  without  keeping  always  in  view  the 
character  of  the  manufacturing  processes,  the  space, 
power,  and  safety  requirements  of  the  equipment  and 
materials,  and  the  physical  necessities  or  desires  of  the 
working  forces.  And  again,  the  size,  type,  and  class  of 
factory  erected  or  leased  may  rightly  be  subordinated 
to  considerations  which  have  to  do  solely  with  sales  or 

48 


CONSTRUCTION  AND  EQUIPMENT 

with  finance  and  other  administrative  activities.  No 
business  problem  is  a  simple  equation  to  be  settled  off- 
hand without  regard  for  other  activities  which  may  be 
advanced  or  jeopardized  by  the  decision. 

Closely  bound  up  with  construction,  as  we  have  al- 
ready seen,  is  the  problem  of  equipment.  Having  deter- 
mined what  type,  size,  and  shape  your  building  shall  be 
and  what  class  of  construction  is  best  adapted  to  the 
necessities  and  possibilities  of  your  business,  the  broad 
outlines  of  your  machinery  scheme  are  already  clear, 
since  the  general  sequence  of  your  manufacturing  opera- 
tions was  a  factor  in  your  construction  planning.  For 
this  reason  and  for  the  additional  reason  that  knowl- 
edge of  the  development  and  standardization  of  equip- 
ment is  so  general,  it  will  be  enough  here  to  make  the 
briefest  possible  application  of  our  method  of  approach 
to  the  problem. 

This  fact  of  standardization  gives,  in  the  first  place, 
very  little  play  to  the  personal  factor.  Assuming  that 
the  owner  or  manager  has  a  reasonable  acquaintance 
with  current  practice  in  his  field  and  a  competent  su- 
perintendent or  production  engineer  to  advise  him,  his 
choice  of  basic  equipment  will  probably  lie  between 
machines  designed  by  rival  manufacturers  to  achieve 
approximately  the  same  result.  Patent  control  of  spe- 
cial machinery  held  by  his  competitors  may  limit  this 
choice  and  challenge  his  initiative  and  ingenuity  to  find 
other  ejB&cient  and  economical  methods  of  manufactur- 
ing. It  is  only  in  his  decision  on  such  general  questions 
as  that  of  the  type  of  drive  he  will  use  (whether  he  will 
have  individual  electric  motors  or  a  belt-driven  plant), 
and  in  his  choice  of  auxiliary  equipment  for  heating, 
ventilation,  sanitation,  and  lighting  (still  in  the  experi- 

49 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

mental  stage,  though  of  extreme  importance  because 
of  the  legislation  which  is  being  brought  to  bear  upon 
them),  that  the  personal  prejudices  or  prepossessions  of 
the  owner,  if  arbitrarily  indulged,  may  run  him  into 
mechanical  difficulties  or  saddle  the  business  with  dis- 
proportionate expense. 

In  breaking  up  the  problem  of  equipment  into  its 
constituent  problems,  the  concrete  character  of  the 
various  factors  helps  to  define  them  for  the  manage- 
ment. Financial  considerations  come  first,  initial  in- 
vestment needing  to  be  balanced  against  upkeep  costs, 
though  both  are  subordinate,  of  course,  to  the  prime 
question  of  how  much  money  can  be  devoted  to  the  pur- 
chase of  machinery.  Next  in  order  are  the  quantity  and 
quality  of  output  required,  balanced  against  the  kind 
and  class  of  raw  materials  to  be  used;  then  safety  against 
both  fire  and  accident;  finally,  the  matter  of  design. 
This  sub-problem  of  design  will  be  influenced  by  all  the 
factors  just  named  and  by  the  additional  factor  of  the 
capacity  of  the  labor  available. 

In  the  end,  within  the  limits  set  by  capital,  output, 
and  labor  considerations,  the  manager's  problem  will 
narrow  down  to  picking  out  the  particular  model  of 
punch  press  or  turret  lathe,  milling  machine  or  drill 
press,  which  will  handle  the  materials  he  must  use  or  the 
parts  he  must  process  to  the  best  advantage.  This  is 
only  an  outline  suggestion  of  the  manner  in  which  one 
equipment  problem  might  shape  itself;  it  does  not  offer 
an  ironclad  analysis  generally  applicable.  In  some 
cases,  one  or  more  of  the  factors  listed  above  might 
settle  the  question  out  of  hand  and  make  the  others 
negligible;  in  other  instances  new  factors  might  arise 
and  dominate.   But  in  every  case  analysis  of  the  main 

50 


CONSTRUCTION  AND  EQUIPMENT 

problem  into  its  constituent  parts  will  go  far  toward 
suggesting  the  right  solution. 

In  listing  and  weighing  the  factors  in  equipment,  the 
advice  of  the  production  specialist  is  valuable.  The 
owner  or  executive,  unless  he  happens  to  be  factory- 
trained,  is  not  necessarily  familiar  with  technical  de- 
tails, like  the  most  effective  speed  of  screw  machines  on 
various  classes  of  work  or  the  formulae  of  power  trans- 
mission. For  such  information  he  should  call  on  his 
superintendent  or  production  engineer.  His  own  func- 
tion is  to  assemble  and  balance  all  the  factors  bearing  on 
the  general  problem,  including  those  furnished  by  his 
expert  counsel,  and  to  determine  the  relative  weight 
each  is  to  have  in  the  final  decision. 

An  open  mind,  a  fresh  point  of  view,  is  nowhere 
more  essential  than  in  determining  equipment  policies. 
Changes  and  improvements  are  of  almost  daily  occur- 
rence; usage  and  tradition,  therefore,  must  never  be 
allowed  to  block  the  installation  of  the  most  efficient 
types  of  machinery.  It  is  generally  believed,  for  exam- 
ple, that  the  economies  brought  about  in  other  indus- 
tries by  the  use  of  automatic  machinery  are  not  equally 
profitable  in  the  wood-working  groups.  As  a  matter  of 
fact,  automatic  machines  have  been  successfully  em- 
ployed in  a  number  of  wood-working  operations.  Their 
further  development  and  application  will  depend  largely 
on  the  initiative  and  open-mindedness  of  the  men  en- 
gaged in  the  industry,  or  on  the  invasion,  perhaps,  of 
the  wood-working  field  by  men  from  the  metal-working 
groups  who  think  about  any  manufacturing  problem  in 
terms  of  automatic  machinery. 

This  completes  our  outline  and  analysis  of  the  plant 
activities  —  the  policies  which  govern  the  location,  con- 

51 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

struction,  and  equipment  of  the  factory.  As  the  purpose 
was  chiefly  to  illustrate  the  application  of  a  systematic 
method  of  approach  to  any  specific  set  of  business  prob- 
lems, no  attempt  has  been  made  at  an  exhaustive  sur- 
vey. It  was  enough  to  indicate  the  importance  of  a 
definite  method  of  approach  and  to  make  clear  the  steps 
of  that  approach  in  anticipation  of  its  use  later  in  the 
analysis  of  problems  whose  factors  are  less  tangible. 


52 


CHAPTER  V 
MATERIALS 

OVER  against  the  plant  activities  of  production  — 
the  placing,  building,  and  equipping  of  the  fac- 
tory —  is  balanced  the  group  of  activities  concerned 
with  operation.  Their  importance  hinges  on  the  fact 
that  when  the  wheels  begin  to  turn  the  business  ceases 
to  concentrate  on  itself  and  deals  with  factors  which 
in  many  instances  are  difficult  to  control,  unless  control 
has  been  considered  and  provided  for  in  the  location  and 
equipment  of  the  works.  These  outside  relations  have 
to  do  first  with  materials,  their  kind,  quality,  and  the 
freedom  with  which  they  can  be  secured;  and  second 
with  labor,  the  extent  and  character  of  the  market  for 
men.  Together  with  the  organization  of  manufacturing 
processes,  these  make  up  the  operating  activities  of 
production.  As  another  demonstration  of  the  principle 
of  interdependence  which  runs  through  the  whole  struc- 
ture of  business,  their  essential  relations  can  be  briefly 
and  graphically  illustrated  in  the  experience  of  a  group 
of  business  men  in  a  small  city  in  middle  Illinois. 

The  first  adventure  in  production  made  by  this  group 
was  the  manufacture  of  barbed- wire  fencing  in  the  later 
nineties,  before  the  regulation  of  big  business  had  been 
undertaken  by  the  federal  government.  Standard- 
gauge  wire,  the  material  used  by  the  factory,  was  bought 
from  the  nearest  mill  of  a  big  rival,  which  presently 
adopted   a   policy   of   purchase   and   consolidation   of 

53 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

smaller  competitors  whenever  these  became  annoying 
factors  in  sales.  After  running  three  or  four  years  with 
satisfactory  returns,  the  smaller  plant  suddenly  was  con- 
fronted with  advances  in  the  price  of  wire  which  wiped 
out  its  margin  of  profit.  The  manager  had  foreseen  such 
a  possibility  and  had  urged  the  stockholders  to  appro- 
priate for  a  wire-drawing  mill.  They  had  refused,  how- 
ever, and  when  the  last  advance  in  materials  destroyed 
the  profit  margin,  there  was  no  time  to  erect  and  equip 
a  wire  department.  Surrender  on  fairly  generous  terms 
was  the  outcome;  the  stockholders  banked  their  money 
and  watched  the  removal  of  the  equipment  to  another 
plant.   The  factory  itself  was  offered  for  sale. 

The  manager  had  learned  a  drastic  lesson  in  produc- 
tion policy  —  that  you  must  make  sure  of  the  source 
and  price  of  your  raw  materials.  When  the  creative  in- 
stinct stirred  in  him  again,  therefore,  his  systematic  ap- 
proach to  his  new  venture  differed  only  in  form  from 
that  which  has  been  set  forth  in  previous  chapters  — 
recognition  of  the  personal  equation,  analysis  of  the 
general  problem,  the  listing  of  the  factors,  and  the  tak- 
ing of  a  fresh  point  of  view. 

He  concentrated  on  materials,  on  the  building  of  an 
industry  which  could  riot  be  crippled  by  failing  supplies, 
since  his  location,  construction,  and  labor  problems 
were  already  solved  if  only  he  could  bring  his  material 
and  equipment  problems  into  accord  with  them.  A 
factory  and  power  house  could  be  had  cheaply,  with 
outlets  on  three  railroads  and  advantageous  freight 
rates  to  several  merchandising  centers.  Labor,  after  a 
long  season  of  unemployment,  could  be  hired  reason- 
ably and  could  be  depended  upon  for  energetic  and  in- 
telligent cooperation.    The  men  were  machine-tenders, 

54 


MATERIALS 

**  handy  men,"  who  could  not  easily  be  developed  into 
mechanics.  Their  capacities  had  to  be  considered  in 
deciding  what  to  make  and  how  to  make  it.  Repeat 
operations  by  semi-automatic  machinery  on  some  un- 
controlled raw  material  were  the  essentials  of  success 
in  production. 

Three  raw  materials  stood  out  as  possibilities.  Plas- 
tic shales  were  abundant  locally  for  the  manufacture  of 
sewer  pipe,  fire  brick,  and  fireproofing  ware.  Merchant 
steel  was  offered  by  independent  sources  at  fair  prices. 
Lumber  and  timber  were  to  be  had  cheaply  and  in  any 
quantity,  particularly  soft  woods  from  the  great  mar- 
kets on  the  Mississippi  River. 

Checking  the  advantages  and  disadvantages  of  each 
material  against  the  others,  the  manager  chose  to  enter 
wood-working.  There  was  a  local  clay  industry  whose 
moderate  dividends  would  stand  in  the  way  of  interest- 
ing capital  in  another  competing  plant;  besides,  the 
available  factory  was  ill  adapted  to  the  making  of  clay 
products.  Steel- working  offered  no  special  advantages 
such  as  did  the  presence  of  the  low-priced  timber  supply. 
Wood- working,  therefore,  was  the  logical  field;  but 
what  kind  of  product?  In  turn,  the  manager  took  up 
and  dismissed  the  manufacture  of  kitchen  furniture, 
wooden  toys,  cheap  trunks,  incubators,  variety  store 
goods,  and  a  number  of  similar  lines.  No  one  of  these 
would  command  a  ready  market  or  possess  imperative 
selling  arguments. 

By  a  process  of  elimination,  the  manager  finally  deter- 
mined to  make  matches.  Not  by  the  patented  auto- 
matic process  controlled  by  an  organization  of  national 
scope,  but  by  the  German  method  which  broke  match- 
making up  into  a  dozen  or  more  operations  by  spe- 

55 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

cialized  machines.  The  speed  and  cheapness  of  the 
American  process  were  partly  neutrahzed  by  the  cost  of 
the  cork  pine  required  as  material.  The  German  ma- 
chines, on  the  contrary,  would  chew  almost  any  soft 
wood  up  into  match  blanks  and  turn  out  an  acceptable 
product.  Their  operation  was  simple  enough  to  be 
learned  in  a  day.  The  match  produced  had  its  own  good 
points,  besides  the  powerful  sales  argument  that  it  was 
"  not  made  by  a  trust."  In  addition,  all  the  neighboring 
cities  were  wholesale  grocery  centers,  which  would  in- 
sure a  ready  market  distribution.  To  sum  up  in  a  sen- 
tence, the  new  business  was  able  to  double  its  original 
capital  out  of  the  profits  of  the  first  year  because  its 
manager  had  analyzed  his  plant  problems,  coordinated 
them  with  his  operating  activities,  and  worked  out 
a  well-balanced  scheme  of  production  and  distribu- 
tion. 

In  solving  his  material  problem,  this  match-maker 
was  not  influenced  in  the  least  by  personal  preference  or 
prejudice,  but  based  his  decision  entirely  on  logical  con- 
siderations. As  a  rule,  indeed,  the  personal  equation 
does  not  enter  into  the  choice  of  raw  materials  to  any- 
thing like  the  same  extent  as  in  the  determination  of 
other  plant  policies.  The  character,  quality,  and  price 
of  the  product  fix  in  a  large  measure  the  kind  and  qual- 
ity of  the  materials  to  be  used.  Yet  this  is  not  always 
true.  One  publisher,  for  instance,  has  such  a  strong 
liking  for  a  certain  blue-white  paper  that  he  uses  it  for 
the  printing  of  his  magazine,  though  he  might  make  a 
substantial  saving  by  using  a  cheaper  natural-white 
paper  which  would  meet  every  printing  requirement 
and  which  probably  would  be  equally  satisfactory  to  the 
magazine's  readers. 

56 


MATERIALS 

The  manager's  broad  policy  on  materials  must  be 
determined  by  his  analysis  of  conditions  from  the  stand- 
point of  (1)  the  kind  of  material  to  be  used;  (2)  the 
quality  of  material;  (3)  sources  from  which  material 
can  be  drawn;  (4)  the  control  of  material;  (5)  the  utiliza- 
tion of  material  in  the  factory. 

Within  reasonable  limits,  it  is  clear  that  he  must  indi- 
cate the  kind  of  material  to  be  used.  In  making  filing 
cabinets,  for  example,  he  would  at  least  decide  whether 
wood  or  metal  cabinets  were  to  be  produced.  He  would 
be  governed  here  by  consideration  not  only  of  current 
but  of  future  conditions.  Is  the  present  supply  of  raw 
materials  adequate  and  reasonable  in  price.'*  Does  it 
threaten  to  diminish  or  run  out?  In  such  an  event,  are 
other  sources  available,  or  can  a  substitute  be  found  at  a 
cost  which  the  price  of  the  product  will  allow?  In  cer- 
tain of  the  wood-working  industries,  for  instance,  pine 
lumber,  when  its  cost  became  prohibitive,  was  replaced 
by  basswood;  in  like  manner  when  the  hardwoods  used 
for  furniture  appreciated  in  value,  recourse  was  had  to 
a  veneer  construction  which  allowed  combination  with 
various  cheaper  grades  of  lumber. 

In  prescribing  the  quality  of  the  materials,  the  man- 
ager must  be  governed  largely  by  financial  and  market- 
ing considerations,  the  selling  price  and  the  profit  per 
unit  of  output.  When  the  product  is  a  specialty  with 
a  wide  margin  between  the  factory  cost  and  the  selling 
price,  the  definite  policy  may  be  established  of  using 
only  the  highest  grade  of  materials  even  though  cheaper 
grades  might  be  employed  without  sacrificing  any  of  the 
service  rendered  the  consumer.  This  probably  has  been 
the  policy  followed  by  the  manufacturers  of  the  more 
expensive  safety  razors.    Certainly  it  is  true  in  general 

57 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

that  the  making  of  a  "  quality  "  article  requires  "  qual- 
ity "  materials.  But  the  management  should  never  lose 
sight  of  the  fact  that  the  substitution  of  cheaper,  though 
not  less  efficient,  materials  might  enable  it  to  lower  the 
price  to  a  point  where  a  marked  increase  in  sales  would 
result. 

An  instance  of  the  substitution  of  materials  against 
trade  custom  is  furnished  by  a  manufacturer  of  vacuum 
cleaners.  He  found  that  the  use  of  pressed  steel  instead 
of  aluminum  gave  him  a  cheaper,  lighter,  and  stronger 
product.  The  first  cost  of  the  new  dies  was  a  strong 
argument  against  the  change,  but  it  was  outweighed, 
according  to  the  manufacturer's  analysis,  by  the  saving 
that  would  follow. 

The  policies  influencing  the  control  of  materials  are 
dictated  not  alone  by  technical  or  intra-departmental 
considerations  but  by  those  which  look  to  the  general 
good  of  the  business.  By  control  is  meant,  particularly, 
the  disposition  of  materials  after  they  have  been  placed 
in  stock,  rather  than  the  insurance  of  adequate  sources 
of  supply.  The  strategic  position  of  the  manager,  suf- 
ficiently withdrawn  from  departmental  affairs  to  see 
them  all  in  their  right  proportions,  enables  him  to  deter- 
mine policies  which  will  make  the  most  of  his  resources 
and  result  in  the  greatest  general  efficiency  of  the  busi- 
ness as  a  whole.  In  his  control  of  materials,  for  example, 
he  must  strike  a  balance  between  an  excessive  inventory, 
representing  idle  capital,  and  a  possible  shortage  of  ma- 
terials which  would  mean  a  loss  due  to  idle  machinery. 
In  order  to  establish  a  balance  between  these  two  fac- 
tors, his  supply  of  materials  must  be  brought  into  equi- 
librium with  the  needs  of  his  production  departments. 

It  is  here  that  the  assumption  of  a  fresh  point  of  view 

58 


MATERIALS 

and  the  discarding  of  traditions  to  make  way  for  de- 
cisions based  on  actual  conditions  demonstrate  their 
value.  According  to  the  records  of  eflBciency  engineers, 
overinvestment  in  materials,  the  carrying  of  excessive 
raw  stocks,  is  a  common  fault  in  American  factories. 
The  inventory  is  usually  the  first  problem  they  address 
themselves  to,  because  it  is  at  this  point  that  the  quick- 
est and  most  convincing  savings  can  be  developed. 

Instances  could  be  cited  almost  without  end :  like  that 
of  a  Massachusetts  company  which  projected  a  bond 
issue  in  order  to  finance  further  extensions.  Investiga- 
tion of  its  assets  discovered  that  at  least  $200,000  worth 
of  materials  were  in  storage  in  excess  of  probable  require- 
ments, and  the  funds  needed  for  expansion  were  released 
by  reduction  of  the  inventory.  Or  that  of  an  Indiana 
manufacturing  concern,  too  young  and  possessed  of  too 
little  in  the  way  of  tangible  assets  to  attempt  a  bond 
issue,  which  was  able  to  finance  a  twenty-five  per  cent 
increase  in  sales  by  strict  coordination  of  its  production 
and  purchasing  program. 

Unbalanced  accumulation  of  stock  and  supplies  is 
generally  the  explanation  of  an  excess  inventory.  One 
department  head  is  uneasy  unless  he  has  materials  on 
hand  for  six  months'  requirements;  another  finds  stores 
for  three  months  entirely  adequate.  Unless  it  be  more 
difl&cult  to  secure  prompt  deliveries  of  the  materials 
used  by  the  first  department,  or  unless  other  considera- 
tions, such  as  market  fluctuations,  are  involved,  it  is 
evident  that  any  stock  maintained  in  excess  of  three 
months'  needs  involves  a  waste.  Use  of  the  capital  tied 
up  in  the  surplus  inventory  and  the  space  occupied  are 
lost  for  productive  purposes.  The  importance  of  main- 
taining an  executive  policy  of  control  over  stores  is  ob- 

59 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

vious;  without  such  general  control,  overinvestment  and 
unbalanced  accumulation  are  almost  inevitable. 

The  question  of  utilization  also  comes  up  for  final  de- 
cision by  the  executive,  particularly  in  cases  where  by- 
products can  be  manufactured  out  of  scrap  material. 
The  packing  industry  affords,  perhaps,  the  best  known 
illustration  of  utilization  of  raw  materials.  Even  here, 
however,  development  has  been  slow,  and  the  manufac- 
ture of  by-products  as  a  production  policy  was  enforced 
by  economic  necessity  rather  than  adopted  deliberately 
as  an  essential  of  constructive  business. 

In  the  main,  raw  materials  of  every  class  have  been 
so  cheap  and  abundant  in  the  United  States  that  there 
has  been  no  such  pressure  to  secure  complete  utilization 
as  is  felt  in  Germany,  France,  and  England.  Effort  has 
been  concentrated  on  manufacturing  processes  and  on 
the  turning  out  of  the  finished  product  rather  than  on 
economy  of  materials. 

Solution  of  these  problems  of  control  and  utilization, 
even  more  than  problems  of  the  kind  and  quality  of 
materials,  is  facilitated  by  a  fresh  point  of  view  on  the 
part  of  the  management.  That  a  business  man  has 
prospered,  for  instance,  in  the  face  of  incomplete  stock 
records,  haphazard  buying,  and  slovenly  control  of  ma- 
terials in  process,  is  not  proof  that  stock  records  are 
negligible  or  an  inflexible  system  of  requisitions  for  ma- 
terials unimportant.  It  may  simply  mean  that  leaks  in 
the  factory  have  been  covered  up  by  the  high  profit 
margin  of  the  business  and  that  these  losses,  if  detected 
and  checked,  might  have  added  materially  to  the  net 
returns  or  allowed  price  reductions  to  the  consumer. 
Too  often  stock  records  are  regarded  merely  as  insur- 
ance against  dishonesty,  while  their  larger  and  more 

60 


MATERIALS 

useful  function  as  a  stimulus  to  efficiency  is  over- 
looked. 

So  also  with  utilization.  Modern  production  stand- 
ards, it  may  fairly  be  said,  are  based  on  laboratory 
studies.  Essential  in  those  factories  which  have  to  do 
with  highly  technical  or  complex  processes,  this  prac- 
tice of  establishing  absolute  standards  may  be  overdone 
or  misdirected,  but  it  is  normally  a  most  effective  appli- 
cation of  a  new  point  of  view.  No  progressive  manu- 
facturer, for  instance,  takes  chances  any  longer  with 
his  glue,  varnish,  enamel,  paint,  wood,  or  coal. 

The  day  of  crude,  rule-of -thumb  experimentation  has 
passed.  Producers  now  buy  their  materials  on  the  basis 
of  exact  knowledge ;  they  do  not  buy  merely  because  of 
somebody's  casual  recommendation  or  because  the  local 
agent  is  a  friend  or  because  the  first  cost  is  low.  The 
furniture  maker  no  longer  buys  twelve-cent  glue  if  he 
has  found  that  eighteen-cent  glue  goes  further  and  holds 
best.  Though  higher  in  first  cost,  in  final  cost  it  may  be 
much  the  cheaper.  Moreover,  it  saves  trouble  in  the 
factory  and  dissatisfaction  on  the  part  of  customers,  the 
money  value  of  which  he  can  measure  only  indirectly. 
To  insure  that  he  is  getting  the  best  quality  of  glue 
available  for  his  money,  and  that  the  quality  of  the 
adopted  brand  does  not  subsequently  deteriorate,  he 
often  maintains  a  laboratory  or  employs  a  competent 
chemist  on  a  fee  basis,  by  whom  not  only  glue  but  all 
his  other  materials  of  manufacture,  including  his  fuel, 
are  systematically  tested.  This,  with  an  efficient  cost 
system  to  show  him  what  materials  work  up  to  the  best 
advantage  and  with  the  least  waste,  enables  him  to  pur- 
chase on  a  basis  of  true  economy. 

Standardization  of  materials  can  affect  the  sizes  and 

61 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

shapes  in  which  these  materials  are  bought  as  well  as  the 
quality.  A  manufacturer  of  steel  folding  couches,  for 
instance,  was  making  his  products  seventy-four  and  a 
half  inches  long.  The  long  pieces  in  the  framework  of 
the  couch  were  made  of  extra  heavy  material.  The 
nearest  stock  length  in  this  weight  left  nearly  two  feet 
of  scrap  which  could  not  be  used  for  any  other  purpose. 
By  reducing  the  length  of  the  couch  one  and  one  half 
inches,  however,  a  slightly  lighter  angle  iron  that  cut 
with  practically  no  waste  could  be  utilized,  making  a 
double  saving  of  a  cheaper  material  and  less  waste. 
Before  the  change  was  made,  investigation  showed  that 
the  demand  for  the  seventy -three-inch  couch  was  likely 
to  be  just  as  great  as  for  the  longer  model. 

Somewhat  similar  was  the  experience  of  a  large  manu- 
facturer of  farm  implements.  At  various  intervals,  as 
models  were  added  to  the  line,  special  designs  were  made 
for  all  the  parts,  without  any  attempt  at  standardiza- 
tion or  the  establishing  of  relations  with  other  models. 
Patterns  for  certain  similar  parts  varied  only  an  eighth 
or  a  quarter  of  an  inch  in  length;  there  were  literally 
hundreds  of  parts  which  might  be  made  interchange- 
able with  other  parts  by  means  of  minor  changes.  The 
manager,  bringing  a  fresh  point  of  view  to  bear  on  a  pol- 
icy which  had  become  traditional,  ordered  the  redesign- 
ing of  the  whole  line  with  a  view  of  standardization  and 
the  purchase  of  raw  materials  in  stock  dimensions. 
Thus  the  same  parts  were  made  available  for  use  in  more 
than  one  model,  and  the  same  lengths  and  weights  of 
steel  rods,  bars,  and  angles  became  standard  for  many 
similar  parts.  The  savings  were  substantial:  buying 
was  simplified  and  prices  were  generally  lowered;  the 
inventory  was  reduced;  less  storage  space  was  required; 

62 


MATERIALS 

the  number  of  different  sizes  of  raw  stock  carried  was 
cut  in  half;  while  the  standardization  of  parts  lowered 
production  costs  and  greatly  reduced  the  stock  of  fin- 
ished parts  in  storage. 

Such  radical  departures  from  routine  are  likely  to  be 
found  only  when  the  management  has  preserved  its 
strategic  position,  aloof  from  departmental  details  and 
able,  therefore,  to  view  problems  like  this  one  of  ma- 
terials from  the  standpoint  of  general  efficiency.  Close 
contact  with  processes  and  machinery  and  familiarity 
with  existing  methods  breed  in  foremen  and  others 
directly  identified  with  the  handling  of  materials  a 
habit  of  acceptance.  It  is  by  the  manager,  then,  with 
his  unbiased  attitude  and  his  ability  to  analyze  condi- 
tions that  the  opportunities  for  standardization  can  best 
be  observed  and  the  most  effective  relations  between 
operations  and  materials  can  be  established. 


CHAPTER  VI 
LABOR 

WHEN  the  paymaster  walks  through  the  factory  or 
oflSce  with  his  box  of  envelopes,  he  completes  a 
week's  transactions  between  management  and  men. 
The  cash  or  checks  are  exchanged  for  labor.  How  much 
money  for  how  much  labor  depends  on  many  conditions. 
The  unit  of  payment  may  be  the  hour  or  day,  with 
loosely  defined  minimum  and  maximum  results  as  the 
commodity  delivered  by  the  worker.  Again,  it  may  be 
a  swift  repeat  operation  on  a  standard  part  or  a  complex 
assembling  process  requiring  many  hours  to  finish.  It 
may  be  any  one  of  several  combinations  or  variations  of 
time  units  or  result  units.  But  in  every  case  the  purpose 
is  the  same  —  to  secure  for  each  dollar  expended  the 
largest  regular  day  by  day  and  year  by  year  return  in 
productive  effort. 

To  the  employee  the  money  is  the  essential  factor  in 
the  transaction.  How  far  this  pocket  appeal  can  be  in- 
creased by  the  method  of  fixing  and  paying  wages  or 
can  be  supplemented  by  cultivating  the  pride,  ambition, 
latent  skill,  or  unawakened  intelligence  of  the  worker 
depends  upon  the  policy  of  the  management  in  ap- 
proaching and  handling  its  labor  problems.  Low  average 
wages  frequently  occur  in  shops  where  production  costs 
are  far  above  the  normal;  and  thirty-dollar  mechanics 
may  predominate  in  a  factory  similarly  equipped  where 
goods  are  turned   out  at  bed-rock   figures.     The   re- 

64 


LABOR 

verse  of  both  statements  may  also  be  true;  the  ratio 
between  wages  and  efficiency  varies  widely,  though 
there  is  a  marked  tendency  toward  leveling  up  and  the 
establishment  of  standards  in  certain  groups  of  related 
industries. 

The  reason  for  this  variation  is  plain.  In  the  hiring 
and  directing  of  labor,  the  human  factor  counts  for 
much  more  than  in  any  other  activity  of  production. 
Assuming  that  the  manager  has  been  broad  and  wise 
enough  to  minimize  his  own  prejudices  and  preposses- 
sions (reckoning  with  trade  unionism,  for  instance, 
more  from  the  viewpoint  of  the  efficiency  of  the  whole 
business  and  less  from  his  personal,  social,  or  sentimen- 
tal standpoint)  he  will  have  to  face,  and  find  a  way  to 
neutralize,  the  personal  equations  of  his  men.  They 
will  concentrate  on  wages,  hours  of  labor,  and,  perhaps, 
recognition  of  the  unions  which  have  exerted  so  power- 
ful an  influence  on  both  wages  and  hours.  His  problem 
is  likely  to  take  the  form  of  the  query:  What  more 
besides  wages  and  hours?  These  are  essential  for  mere 
time-serving.  Real  efficiency  must  be  bought  at  a  higher 
price  and  paid  for  either  in  added  money  or  applied 
intelligence  of  management. 

His  problem,  like  all  business  problems,  can  be  solved 
more  easily  and  with  greater  certainty  by  breaking  it 
up  into  its  constituent  parts.  Analysis,  indeed,  will 
develop  two  groups  of  problems.  The  first  has  to  do 
with  the  classification  of  workers  according  to  their 
functions,  the  temperaments  and  characteristics  of  the 
individuals  usually  exercising  those  functions,  and  the 
motives  which  appeal  most  effectively  to  each  group. 
This  classification  is  basic,  for  the  second  group,  the 
process-problems  of  labor  (hiring,  training,  paying,  and 

65 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

directing) ,  will  be  found  to  differ  in  considerable  degree 
for  each  class  —  factory  workers,  factory  foremen,  oflBce 
employees,  salesmen,  and  general  executives.  Because 
we  are  dealing  as  yet  only  with  production  policies  and 
need  not  go  beyond  the  factory  to  illustrate  a  systematic 
approach  to  the  general  problem  of  labor,  any  reference 
to  the  factors  which  must  be  considered  in  the  hiring  and 
managing  of  men  outside  the  production  departments 
will  be  only  incidental. 

Viewed  broadly,  factory  workers  have  certain  class 
characteristics  which  make  the  problem  of  managing 
them  difiFer  materially  from  the  problems  which  arise 
in  the  managing  of  salesmen  or  oflBce  help.  In  common 
with  all  other  groups  of  intelligent  workers,  they  have 
ambition;  but  it  is  usually  ambition  tempered  by  a  cer- 
tain distrust  of  the  employer's  motives  and  held  in 
check  by  what  amounts  to  a  class  philosophy.  It  is  the 
manager's  task  to  overcome  this  suspicion  and  to  make 
clear  that  loyalty  to  the  company,  interest  in  its  prog- 
ress, and  pride  in  its  product  are  entirely  compatible 
with  loyalty  to  labor  organizations,  where  such  organ- 
izations exist.  He  must  keep  in  mind  that  the  narrow 
education  of  the  worker  and  the  constant  pressure  of 
his  environment  combine  in  urging  him  to  treat  the 
employer  as  an  impersonal  force  whose  interests  are 
selfish  and  therefore  hostile,  and  to  bargain  with  him 
on  the  basis  of  giving  as  little  and  getting  as  much  in 
return  as  circumstances  will  allow. 

We  may  as  well  admit  that  this  is  the  attitude  of 
skilled  and  semi-skilled  workmen  in  every  large  labor 
market.  To  escape  it  many  firms  have  chosen  to  move 
to  country  towns,  sacrificing  whatever  advantages  the 
large  city  offered  to  escape  disturbing  labor  conditions. 

66 


LABOR 

Other  concerns  have  joined  issue  on  the  question,  de- 
claring for  the  open  shop  on  the  ground  that  unionism 
is  the  chief  factor  in  antagonizing  workers.  Still  other 
managers  have  taken  for  granted  a  certain  indifference 
on  the  part  of  employees  and  have  directed  their  efforts 
toward  changing  this  attitude  to  one  of  confidence  in 
the  management,  comprehension  of  what  it  is  trying  to 
accomplish  both  inside  the  organization  and  outside, 
interest  in  the  day's  work,  however  monotonous,  pride 
in  the  quality  or  quantity  of  product,  and  cooperation 
for  mutual  advantage.  This  is  an  ambitious  program, 
but  it  is  these  latter  executives  who  have  made  the  most 
important  advances  in  the  methods  and  philosophy  of 
employment,  and  it  is  their  experience  which  is  drawn 
upon  in  the  shaping  of  this  chapter. 

When  a  manufacturer  analyzes  his  labor  problem  into 
its  elements,  the  question  of  balanced  output  comes 
first  and  looms  largest  in  his  thoughts.  How  can  he 
secure  a  reasonable  maximum  in  quantity,  the  essential 
accompaniment  of  low  production  costs,  yet  maintain 
requisite  standards  of  quality  and  avoid  more  than  a 
minimum  of  spoiled  parts?  Bearing  on  this,  his  main 
objective,  are  the  personal  traits  of  his  employees,  their 
honesty  and  industry,  their  skill  and  sense  of  respon- 
sibility, and  also  their  mental  attitude  toward  their 
work  and  toward  his  management.  Personal  traits  and 
qualities  are  fundamental  considerations  in  hiring  men, 
though  the  good  ones  may  be  developed  by  subsequent 
training  and  the  harmful  ones  corrected  or  eliminated. 
Assuming  a  factory  force  of  average  spirit  and  caliber, 
however,  its  mental  attitude  is  a  problem  of  daily  prac- 
tical concern.  How  can  it  be  influenced.''  How  can  it 
be  brought  into  accord  with  the  purposes  of  the  manage- 

67 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

ment  and  be  made  a  constructive  force,  instead  of  one 
merely  negative  or  antagonistic? 

The  broad  basis  of  appeal,  he  will  find,  is  pay  scientifi- 
cally proportioned  to  individual  efiFort.  Ease,  conven- 
ience, and  safety  are  convincing  arguments.  Caution, 
as  to  retaining  place,  service  credits,  preferred  work, 
or  other  privileges,  is  a  powerful  motive  to  invoke.  Pride 
in  workmanship,  in  the  company's  standing,  in  the  per- 
fection and  value  of  its  products,  is  a  sentiment  which 
can  be  stirred  only  when  conditions  are  generally  satis- 
factory, that  is,  when  the  worker  is  convinced  that  he  is 
receiving  a  square  deal.  Praise  of  a  man's  ability  or 
achievement  soon  loses  its  savor  unless  it  "  gets  him 
something  "  in  the  way  of  increased  pay  or  promotion. 

Money  and  material  utilities  are  the  solid  foundations 
on  which  alone  efficiency  can  be  built.  The  workman's 
natural  tendency  is  to  strike  a  balance  between  the  ad- 
vantages the  manager  offers  and  those  held  out  by  other 
employers.  No  appeals  less  tangible  are  allowed  to  out- 
weigh these  necessities.  Certainty  of  employment  on 
full  time  or  nearly  full  time  is  an  essential  for  men  who 
have  families  and  others  who  want  to  get  ahead.  Self- 
interest,  in  fact,  is  the  only  compelling  motive  which  can 
be  enlisted  to  secure  cooperation  in  the  betterment  of 
existing  methods  or  the  mstalling  of  improved  systems. 
If  he  can  adopt  the  easier  or  more  direct  method  without 
losing  any  of  his  pay  per  unit  of  production,  the  average 
factory  worker  will  welcome  the  change.  Unless  he  gets 
a  share  of  the  profit  coming  from  his  increase  in  output, 
however,  suspicion  that  he  is  being  "  speeded  up  "  is 
likely  to  follow.  Confidence  in  the  manager  and  his  mo- 
tives must  precede  any  successful  attempt  to  increase 
the  productive  capacity  of  an  organization. 

68 


LABOR 

Paying  labor,  then,  is  the  crucial  problem,  though 
training,  placing,  and  directing  are  vital  questions  in  any 
eflSciency  program.  Hiring,  a  preliminary  operation,  will 
not  be  taken  up  here  because,  at  any  rate  in  the  large 
plants,  it  is  usually  an  administrative  function  and  will 
be  reserved  for  discussion  with  other  activities  of  ad- 
ministration in  a  later  chapter.  Any  plan  of  payment, 
we  have  seen,  should  furnish  the  worker  with  an  incen- 
tive to  increased  production  through  addition  to  his 
income.  The  best  wage  system,  indeed,  is  that  which 
makes  clear  to  the  worker  the  exact  relation  between  his 
effort  and  the  amount  which  he  receives  for  it.  At  the 
same  time,  it  must  not  add  to  unit  production  costs.  The 
manager  must  hold  at  least  to  his  established  ratio  of 
cost,  quality,  and  service,  while  the  prime  object  of  any 
change,  of  course,  is  to  cut  down  the  first  element  in  this 
business  equation.  This  to  the  management  is  no  less 
a  test  than  self-interest  to  the  employee,  of  any  new 
method  of  wage  payment.  Does  it  actually  lower  pro- 
duction costs?  Personal  prejudice,  sentiment,  or  con- 
venience should  never  be  permitted  to  govern  or  even 
cloud  the  decision. 

In  his  approach  to  this  problem  of  payment,  the 
manager  has  for  his  guidance  the  experience  of  other 
employers,  many  of  whom  have  conducted  extended 
investigations  and  long  series  of  experiments  to  deter- 
mine the  most  effective  wage  plan.  He  must  under- 
stand, however,  what  his  real  problem  is;  how  it  divides; 
what  are  the  factors  that  count  in  the  solution  of  each 
sub-problem;  and  how  he  can  apply  in  his  own  factory 
the  methods  which  have  been  more  or  less  successfully 
demonstrated  by  other  manufacturers  and  production 
specialists. 

69 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

Dividing  the  problem  into  its  constituents  and  con- 
sidering each,  the  manager  finds  himself  facing  a  choice 
among  several  methods  of  paying  men.  There  are  the 
systems  long  in  use,  the  day  rate,  the  piece  rate,  and 
the  contract  system,  all  relatively  simple,  but  all  having 
the  common  weakness  that  the  personal  factor  is  large 
in  determining  how  much  productive  effort  labor  shall 
deliver  for  each  dollar  received.  Where  the  straight  day 
wage  is  maintained,  output  is  often  a  compromise  be- 
tween customary  trade  standards  plus  the  man's  idea 
of  what  is  fair  and  the  ability  of  the  management  to 
speed  up  its  machines  and  workmen  without  causing 
revolt.  Whether  this  compromise  basis  is  above  or 
below  the  average  depends  chiefly  on  the  personality 
of  the  manager,  on  his  sympathy,  magnetism,  and  other 
qualities  of  leadership,  and  in  lesser  degree  on  the  size 
and  character  of  the  force  itself. 

The  great  defect  of  the  traditional  day  rate  is  that  it 
offers  no  direct  incentive  for  the  individual  employee  to 
exert  himself  to  his  full  capacity.  The  piece  rate  is  an 
advance  on  this  primitive  method  of  measuring  energy 
in  terms  of  time.  Where  many  repeat  operations  are 
performed  and  where  time  studies  or  a  series  of  obser- 
vations and  experiments  have  established  trustworthy 
standards,  the  piece  rate  supplies  an  incentive  to  higher 
efficiency  and  a  fuller  utilization  of  the  plant.  When 
such  standards  have  not  been  worked  out,  however,  it 
gives  too  much  play  to  the  personal  equation  in  setting 
rates  and  in  the  majority  of  shops  leads  the  men  to  put 
a  secret  but  practical  limit  on  individual  production. 
Moreover,  without  an  adequate  inspection  system, 
quality  may  be  sacrificed  to  output.  In  a  word,  the 
interests  of  manager  and  men  are  still  tangential  in- 

70 


LABOR 

stead  of  parallel.  The  contract  system  is  simply  the 
piece  rate  applied  to  a  group  or  cycle  of  operations  in- 
volving a  number  of  workmen,  and  is  subject  to  the 
same  drawbacks  and  limitations. 

From  the  simple  forms  of  both  day  rate  and  piece 
rate  various  systems  of  payment  have  been  developed 
to  overcome  their  basic  weakness,  that  is,  lack  of  an 
imperative  incentive  for  the  workman  to  employ  time 
and  equipment  to  their  fullest  productiveness.  The 
straight  piece  rate,  which  pays  one  price  per  unit  of 
work  done  whether  the  rate  of  eflSciency  be  high  or  low, 
has  been  supplemented  in  many  factories  by  the  fixing 
of  a  daily  or  weekly  task  which  the  workman  must  equal 
in  order  to  hold  his  place.  The  graduated  or  differential 
piece  rate  modifies  this  appeal  to  caution  by  offering  a 
high  rate  for  performance  of  the  task  in  a  given  time 
and  a  lower  rate  if  the  workman  falls  short  of  this  stand- 
ard eflSciency.  An  interesting  variation  is  the  Franklin 
quality  piece  rate  which  puts  the  emphasis  on  perfect 
work  by  paying  the  maximum  when  spoilage  is  elim- 
inated and  reducing  the  rate  paid  as  the  proportion  of 
spoiled  parts  increases. 

The  development  of  the  day  rate  has  taken  shape  in 
bonus  or  premium  systems,  which  are  based  on  the  idea 
of  rewarding  the  workman  for  saving  time  and  cutting 
costs  by  sharing  with  him  the  money  thus  saved.  The 
Towne  system  was  one  of  the  earliest  of  these;  it  made 
an  annual  pro-rated  distribution  of  the  saving  in  labor 
costs  over  those  of  the  best  preceding  year,  the  company 
taking  its  reward  in  the  increased  production  per  fac- 
tory unit.  The  Halsey  premium  plan  went  a  step  fur- 
ther. It  made  the  workman's  reward  immediate  and 
individual  by  fixing  a  definite  time  limit  for  each  opera- 

71 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

tion  (based  on  past  performances),  paying  the  worker 
his  regular  hourly  rate  for  the  time  spent  in  executing 
it,  but  allowing  him  a  bonus  if  he  finished  in  less  than 
the  specified  time.  This  premium  is  usually  half  the 
labor  cost  thus  saved.  The  Rowan  system  differs  from 
the  Halsey  plan  by  making  the  workman's  premium 
a  percentage  of  the  standard  labor  cost  equal  to  the 
percentage  of  the  standard  time  which  his  saving 
represents. 

Both  the  Towne-Halsey  and  the  Rowan  systems 
showed  flaws  in  operation  —  the  first  by  putting  the 
fixing  of  the  standard  times  entirely  in  the  hands  of  the 
workmen,  the  second  by  cutting  the  premium  paid  for 
any  saving  of  more  than  fifty  per  cent.  They  are  ob- 
jected to  further  because  as  the  workman's  production 
increases,  his  earnings  per  piece  decrease.  To  avoid 
these  faults,  the  Emerson  system  based  its  standard 
times  on  workmen's  performances  corrected  by  expert 
motion-and-time  studies,  demanded  two  thirds  of  this 
standard  eflBciency  of  every  workman,  and  paid  gradu- 
ated premiums  for  every  increase  above  the  minimum. 
When  the  workman  equaled  the  standard  time,  his 
bonus  amounted  to  twenty  per  cent  of  his  wages;  above 
the  standard  time  the  premiums  increased  one  per  cent 
for  each  per  cent  of  increase  in  eflSciency. 

The  Taylor  differential  piece  rate  puts  forward  a 
final  incentive  to  workmen  by  providing  scientifically 
determined  standard  conditions  and  times  for  work, 
and  offering  higher  piece  rates  as  the  standard  time  is 
approached  and  passed  and  lower  rates  as  the  work- 
man drops  down  in  the  scale  of  eflSciency.  The  task 
and  bonus  plan  evolved  by  H.  L.  Gantt  in  connection 
with  the  Taylor  system  guarantees  the  regular  hourly 

72 


LABOR 

rate  and  offers  the  man  a  bonus  for  attaining  a  previ- 
ously determined  high  level  of  efficiency,  each  man's 
bonus  increasing  as  his  output  above  the  prescribed 
standard  increases.  The  ratio  of  the  bonus  to  the  regu- 
lar hourly  rate  varies  among  different  trades  and  occu- 
pations, according  to  the  character  and  difficulty  of  the 
work.  The  regular  hourly  rate  is  paid  while  the  man 
is  under  instruction. 

There  is  yet  another  approach  to  this  task  of  pro- 
viding an  incentive  to  workers  —  profit-sharing.  In 
the  broader  sense,  it  amounts  to  any  collective  pay- 
ment of  bonuses  for  faitliful  service,  predicated  on  sat- 
isfactory net  earnings  for  the  employer.  It  may  take 
the  Henry  Ford  form  of  decidedly  higher  day  wages, 
which  divide  with  the  workers  every  week  a  prede- 
termined amount  of  the  estimated  profits  of  the  com- 
pany's current  operations;  though  this  might  be  a 
dangerous  proceeding  for  the  average  business  venture, 
which  is  subject  to  the  ups-and-downs  of  the  consuming 
market.  The  more  familiar  form  is  an  arbitrary  sum 
set  aside  by  the  directors  at  the  end  of  every  prosper- 
ous year  for  distribution  among  employees,  the  size  of 
the  lump  sum  and  the  amount  of  the  individual  dividend 
depending  on  the  measure  of  the  company's  prosperity, 
thus  establishing  an  incentive  for  each  worker. 

The  more  sagacious  plans  do  not  leave  the  size  of  the 
worker's  dividend  for  the  management's  decision  at  the 
end  of  the  year.  The  amount  to  be  shared  is  predeter- 
mined; or  at  least  the  percentage  or  proportion  of  the 
net  profits  to  be  shared  is  announced  beforehand.  In 
fact,  in  the  strict  technical  usage  of  the  term,  profit 
sharing  means  a  method  of  remuneration  by  which  the 
employees  receive  in  addition  to  standard  or  normal 

73 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

wages  a  share  of  the  profits  fixed  in  advance.  The 
manner  of  distribution  varies.  The  A.  W.  Burritt 
Company,  for  instance,  after  paying  six  per  cent  on 
capital,  divides  its  net  profit  between  the  stockholders 
and  the  workmen  in  the  ratio  of  capital  invested  to 
wages  earned,  each  workman  receiving  an  amount 
proportionate  to  his  own  wages.  The  workmen  agree 
also  to  share  similarly  any  net  losses,  up  to  ten  per 
cent  of  their  wages.  The  Farr  Alpaca  Company  pays 
the  same  dividend  on  a  dollar  of  wages  as  is  paid  on 
a  dollar  of  capital.  The  R.  F.  Simmons  Company, 
which  began  by  sharing  with  its  workers  from  eight 
to  twelve  per  cent  of  the  dividend  voted  on  its  capital, 
has  gradually  increased  the  amount  so  as  to  insure  its 
representing  four  or  five  per  cent  of  the  employees' 
annual  wages.  The  Simplex  Wire  and  Cable  Com- 
pany determines  in  January  the  percentage  of  profits 
to  be  paid  at  the  end  of  the  year  to  workers  who 
have  been  connected  with  the  company  for  twenty-six 
months  or  more. 

This  latter  emphasis  on  continuity  of  service  is  com- 
mon to  nearly  all  profit-sharing  plans,  which  fix  a  min- 
imum period  for  eligibility  and  increase  the  dividend  in 
proportion  to  the  time  of  employment.  Profit-sharing 
programs  range  widely,  indeed,  in  character  and  effec- 
tiveness; their  weakness  is  that  the  collective  bonuses 
they  offer  fall  short  of  providing  the  constant,  specific, 
and  measurable  incentive  to  individual  workers  which  a 
scientific  system  of  wage  payment  should  supply. 

Facing  these  successful  wage  systems  (outlined  merely 
in  principle  here  0>  the  manager  can  make  a  wise  deci- 

^  For  a  fuller  discussion,  see  C.  B.  Thompson,  "  Scientific  Management," 
and  the  works  cited  in  the  Bibliography  beginning  on  page  863  of  that  book. 

74 


LABOR 

sion  only  by  keeping  a  tight  grip  on  all  the  factors  in- 
volved. His  product  may  be  of  such  a  type  that  the  day 
rate  is  the  only  possible  method  of  maintaining  quality 
or  satisfying  his  production  conditions.  His  organization 
may  be  of  such  size  or  character  that  the  cost  of  instal- 
ling and  maintaining  a  differential  piece  rate,  with  all 
the  conditions  involved,  would  be  prohibitive.  Be- 
tween these  extremes  there  are  a  score  of  alternatives. 
The  conditions  in  different  departments  of  the  same 
business,  in  fact,  often  call  for  different  wage  systems. 
In  choosing  the  one  or  more  than  one  which  fit  his  situ- 
ation, the  executive  must  keep  his  principle  of  balance 
always  in  mind.  The  fresh  point  of  view,  too,  is  of  more 
than  usual  importance,  since  the  wage  systems  of  most 
industries  are  traditional  compromises  or  guesses  devel- 
oped like  all  other  rules  of  thumb.  Its  value,  indeed, 
has  been  generally  recognized :  witness  the  recent  wide- 
spread interest  in  the  Taylor  system  of  shop  manage- 
ment and  other  efficiency  methods,  and  the  associated 
movements  in  many  industries  to  reduce  labor  costs  and 
conditions  to  something  like  common  and  reasonable 
standards.  With  the  overhead  charges  on  factory  oper- 
ations averaging  as  much  as  the  direct  labor  costs,  the 
rewards  are  for  the  manager  who  can  hasten  produc- 
tion and  thereby  reduce  the  proportion  of  rent,  light, 
heat,  power,  and  other  fixed  charges  which  each  unit  of 
product  must  bear.  There,  in  countless  plants,  the 
zone  of  profit  lies. 

But  a  wage  incentive,  however  alluring,  is  not  enough 
to  get  results  from  factory  labor.  With  the  best  will  in 
the  world,  a  workman  must  have  the  knowledge  and 
skill  his  job  demands,  or  his  output  will  suffer  in  quan- 
tity or  quality.  This  knowledge  and  skill  can  frequently 

75 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

be  hired  in  the  larger  markets;  with  a  certain  amount 
of  "  breaking  in,"  a  new  workman  becomes  capable  of 
handling  the  tasks  for  which  he  was  employed.  Quite 
as  often  competent  mechanics  or  machine  operators  are 
not  to  be  had;  or,  if  available,  they  cannot  be  engaged 
except  at  rates  higher  than  conditions  in  the  business  will 
justify.  The  only  alternative,  then,  is  for  the  manager 
to  train  unskilled  labor  to  the  level  of  eflficiency  required. 

Every  factory  organization  confronts  this  situation 
at  more  or  less  regular  intervals.  For  at  least  a  genera- 
tion the  apprentice  system,  limited  in  its  application 
by  the  rules  of  the  unions  and  neglected  by  self-centered 
employees,  has  been  inadequate  to  provide  the  skilled 
workers  our  industrial  expansion  called  for.  Hundreds 
of  thousands  of  English  and  German  mechanics,  emi- 
grating in  answer  to  the  call,  helped  to  supply  the  lack. 
The  division  of  labor  and  the  development  of  automatic 
machinery  of  endless  variety  and  countless  functions 
further  served  the  need.  But  the  burden  of  getting  and 
retaining  men  was  not  lifted  from  the  manufacturer. 
Each  machine  required  an  operator;  and  its  output  in 
no  small  degree  was  measured  by  the  thoroughness  of 
the  training  grafted  on  his  natural  intelligence  and 
dexterity. 

This  fact  gives  the  Taylor  system  and  similar  ef- 
ficiency programs  their  chief  significance.  Their  stand- 
ardizing of  materials,  machines,  processes,  and  methods 
by  means  of  time  and  motion  studies  is  all  preliminary 
to  the  final  task  of  teaching  each  worker  how  to  perform 
his  operation  with  the  least  possible  outlay  of  time  and 
energy.  They  approach  each  process,  each  separate 
motion,  indeed,  from  the  engineering  viewpoint.  Is  it 
necessary?     Is  it  the  most  effective  way  of  doing  the 

76 


LABOR 

thing?  By  observation,  analysis,  and  experiment  they 
arrive  at  a  standard  method.  This  method  they  dem- 
onstrate to  the  worker,  helping  him  to  master  it. 
They  watch  him  try  it  time  after  time,  day  after  day, 
if  necessary,  correcting  his  mistakes,  explaining  the 
how  and  why  of  each  detail,  holding  him  to  the  exact 
technique  they  have  determined  as  the  best.  As  we 
have  seen,  they  get  the  man's  cooperation  by  paying 
him  his  full  wage  while  he  is  under  instruction  and  show- 
ing him  how  he  will  profit  by  following  the  new  proced- 
ure. The  increase  in  wages,  so  graduated  that  the 
highest  premium  can  be  gained  only  by  the  fullest 
cooperation  with  the  management,  supplies  the  incen- 
tive to  effort.  But  the  fixing  of  the  standards  and  the 
training  of  the  workmen  are  indispensable  to  the  success 
of  the  plan. 

Under  the  best  systems,  indeed,  the  training  of  the 
worker  never  ends.  He  is  not  allowed  to  earn  the  maxi- 
mum bonus  one  week  and  slump  the  next.  An  instruc- 
tor-foreman, having  a  limited  group  of  men  in  charge, 
keeps  close  watch  on  his  output  and  exerts  all  his  knowl- 
edge, tact,  and  authority  to  keep  it  up  to  standard. 
As  the  instructor's  own  bonus  is  based  on  the  success 
of  his  men  in  earning  theirs,  the  efficiency  level  is  usually 
maintained.  In  addition  to  the  instructor  or  gang  boss, 
there  are  other  functional  foremen,  such  as  speed  and 
repair  bosses,  inspectors  and  planning-room  men,  each 
of  whom  contributes  his  special  aid  in  achieving  stand- 
ard efficiency. 

One  of  the  indictments  brought  by  sociologists  and 
humanitarians  against  the  modern  factory  system  of 
production  is  that  the  minute  subdivision  of  labor 
dwarfs  the  development  of  the  worker  and  makes  him 

77 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

a  one-operation  specialist  rather  than  an  all  'round  me- 
chanic. At  first  sight  efiiciency  systems  would  seem  to 
exaggerate  this  tendency.  On  close  observation,  how- 
ever, the  opposite  would  seem  true.  The  fresh  view- 
point which  standardization  proposes  to  the  workmen, 
the  mental  exertion  required  to  master  the  technique  of 
the  new  methods,  the  processes  of  analysis  and  syn- 
thesis which  take  place  under  his  eyes,  all  open  new 
channels  of  thought  and  transform  him  from  a  creature 
of  habit  to  a  man  awake,  with  a  mind  open  to  new 
things.  If  he  has  average  intelligence  and  ambition, 
after  mastering  one  process  or  series  of  operations  he 
"  gets  the  hang  "  of  the  new  idea  and  finds  it  easy  to 
master  a  second  and  a  third  or  any  number  of  opera- 
tions which  shop  exigencies  may  propose. 

This  should  eliminate  monotony  of  occupation  and 
supply  something  like  an  equivalent  of  the  training  an 
apprenticeship  or  a  trade  school  might  have  given  him. 
From  certain  factories  where  the  Taylor  system  has 
been  installed  come  reports  of  individual  progress  of 
this  sort  which  would  indicate  the  possibility  of  all 
'round  training  for  employees  without  any  sacrifice  of 
output  while  their  education  was  going  on.  It  is  said 
that  at  the  Tabor  Manufacturing  Company,  Phila- 
delphia, two  young  men  who  gave  promise  of  executive 
ability  were  "  passed  through  "  all  the  departments  of 
the  factory  in  two  years,  reaching  during  that  period 
the  eflBciency  standards  of  every  operation  in  the  plant. 

This  development  of  capable,  "  all  'round  "  men,  first 
for  the  performance  of  single  processes  and  finally  for 
the  supervision  of  groups  of  workers  engaged  on  a  whole 
cycle  of  operations,  has  long  been  recognized  as  an  im- 
portant phase  of  the  management's  labor  problem.  The 

78 


LABOR 

subdivision  of  labor  as  carried  out  in  a  great  many  in- 
dustries has  meant  that  the  apprentice  or  the  unskilled 
man  learns  only  to  tend  certain  special  machines  which 
perform  a  limited  range  of  operations  on  an  unending 
succession  of  similar  jobs.  His  work  becomes  auto- 
matic; there  is  nothing  to  cultivate  skill  outside  his 
narrow  field,  to  develop  his  thinking  power,  or  to  help 
him  to  see  his  own  detail  in  its  relations  to  the  general 
production  scheme.  Take  him  off  his  machine  or  away 
from  his  bench  and  he  must  start  all  over  again. 

Coupling  this  tendency  with  a  general  breakdown 
of  the  apprenticeship  system,  many  of  the  older  and 
larger  industrial  organizations,  like  R.  Hoe  &  Com- 
pany and  the  General  Electric  Company,  have  estab- 
lished apprentice  schools  in  which  selected  boys  are  not 
only  taught  a  trade,  in  the  former  sense  of  the  phrase, 
but  are  given  regular  class-room  instruction  in  shop 
arithmetic,  geometry,  algebra,  drawing,  physics,  me- 
chanics, strength  of  materials,  and  subjects  directly 
related  to  the  technique  of  the  industry  or  calculated 
to  fit  them  for  understanding  all  its  shop  processes. 
This  class  work,  which  occupies  usually  from  three  to 
twelve  hours  a  week,  is  partly  or  wholly  on  the  em- 
ployer's time,  and  the  apprentice  is  required  to  give  it 
the  same  attention  and  show  the  same  progress  in  it 
as  in  his  shop  work. 

At  the  General  Electric  works,  the  courses  are 
planned  to  produce  expert  machinists,  pattern  makers, 
iron  molders,  core  makers,  and  draughtsmen,  though  a 
few  boys  in  every  class  are  taught  blacksmithing,  tin- 
smithing,  and  steam  fitting.  The  course  lasts  four 
years,  during  the  first  three  of  which  the  boys  are  given 
experience  on  the  various  machine  tools  and  are  put  to 

79 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

work  on  as  many  different  processes  as  possible.  In  the 
fourth  year  of  service  they  are  rated  as  competent  work- 
men, so  far  as  quality  of  work  is  concerned,  though  still 
under  direct  charge  of  the  superintendent  of  appren- 
tices. The  draughting  apprentices  serve  their  second 
year  in  the  shops  doing  the  same  class  of  work,  under 
the  same  direction,  as  the  machinist  apprentices.  Anal- 
ogous courses  for  "  student  engineers  "  are  also  con- 
ducted by  this  same  company  with  the  object  of  giving 
graduates  of  technical  schools,  when  they  enter  its 
employ,  experience  in  all  its  production  departments 
and  an  intimate  grasp  of  their  activities. 

Because  the  cost  of  equipping  and  maintaining  effec- 
tive schools  for  apprentices  puts  them  beyond  the  reach 
of  the  ordinary  business,  the  manufacturers  of  Fitch- 
burg,  Massachusetts,  have  adapted  to  their  local  needs 
the  "  half-time  "  plan  of  education  conceived  by  Dean 
Herman  Schneider  for  the  University  of  Cincinnati's 
engineering  school. 

Under  the  Schneider  plan,  seventy-five  or  more  in- 
dustrial plants,  construction  companies,  and  transporta- 
tion lines  cooperate  with  the  university  in  the  training 
of  the  engineering  students.  The  latter  work  in  pairs, 
one  man  attending  the  university  while  the  other  works 
for  wages  at  one  of  the  cooperating  plants.  They  alter- 
nate bi-weekly  at  study  and  service  in  their  common 
job  and  thus  get  an  opportunity  to  "  hitch  their  theo- 
retical knowledge  to  practical  things  and  bring  a  prac- 
tical viewpoint  to  their  studies."  Incidentally  some  of 
them  earn  enough  on  the  various  jobs  they  have,  during 
their  sequential  training  through  the  departments  of 
the  cooperating  concern,  to  keep  them  in  school,  and 
they  all  have  the  valuable  experience  of  turning  out 

80 


LABOR 

commercial  products  under  actual  working  conditions. 
The  manufacturers  secure  high-grade  intelligence  prac- 
tically and  theoretically  trained  at  the  wages  which 
they  pay  any  one  else  for  the  same  class  of  work;  also 
they  have  a  chance  to  pick  possible  executives,  de- 
signers, salesmen,  and  other  high  grade  employees 
among  the  student  graduates.  At  the  same  time  the 
university  is  spared  the  expense  of  equipping  its  lab- 
oratories with  expensive  machinery  and  of  maintaining 
a  staff  of  machinists  and  instructors  to  direct  students' 
practice  work. 

Fitchburg's  manufacturers  have  a  similar  coopera- 
tive arrangement  with  their  city  high  school.  The  first 
year  of  the  four-year  course  there  is  no  interchange 
between  school  and  shop;  but  during  the  last  three 
years  the  pairs  of  pupil-apprentices  serve  alternate 
weeks  under  teachers  and  foremen.  The  school  does 
not  attempt  to  teach  anything  about  practical  shop 
work;  but  concentrates  on  mathematics,  mechanical 
drawing,  elementary  physics,  and  chemistry,  and  other 
branches  which  give  the  pupil  a  grip  on  theory  and  in- 
terpret shop  practice,  broadening  his  outlook  and  in- 
creasing his  capacity.  It  tries  to  answer  his  "  why  " 
questions  and  leaves  the  "  hows  "  to  the  mechanics  and 
foremen  of  the  different  factories. 

Some  manufacturers  have  brought  trade  schools  into 
their  schemes  of  training  labor.  Knowing  that  the 
conditions  under  which  factory  production  goes  for- 
ward make  it  difficult  for  the  apprentice  or  young 
helper  to  get  more  than  a  smattering  of  the  underlying 
trade,  not  a  few  pick  out  at  intervals  boys  of  more  than 
average  character,  force,  and  intelligence  and  help  them 
to  put  themselves  through  a  trade  school  in  order  to 

81 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

master  their  chosen  craft.  The  purpose,  of  course,  is 
to  secure  workmen  of  wider  experience,  skill,  and 
knowledge  than  can  be  developed  in  their  own  plants 
and  to  train  possible  executives.  There  are  numerous 
cases  where  specialists  of  various  sorts,  chemists,  fac- 
tory engineers,  and  the  like  have  been  developed  from 
the  ranks  by  employers  observant  enough  to  notice 
unusual  aptitudes  in  factory  workers  and  keen  enough 
to  give  these  exceptional  men  the  backing  necessary  to 
secure  them  special  technical  training. 

A  most  important  general  policy  governing  the  prob- 
lem of  labor  has  to  do  with  the  manager's  attitude 
toward  trade  unionism.  As  already  suggested,  it  is 
in  this  connection  that  the  personal  factor  is  most  diffi- 
cult to  discount.  Opposition  to  organized  labor,  to  col- 
lective bargaining,  to  contracts  secured  and  enforced 
by  implied  or  expressed  threats  of  strikes  may  be  said 
to  be  one  of  his  normal  habits  of  mind.  For  the  or- 
ganization of  his  employees  on  occupational  lines  is 
certain  to  bring  about  interference  with  his  free  hand 
in  running  the  business.  In  some  businesses,  however, 
compensating  factors  have  arisen  from  recognition  of 
the  unions  and  a  surrender  of  a  portion  of  the  em- 
ployer's power  over  shop  discipline  and  conditions. 
In  a  notable  clothing  concern  in  Chicago,  for  ex- 
ample, the  establishment  of  machinery  for  adjusting 
disputes  is  said  to  have  brought  peace,  stability,  and 
production  betterments  to  an  industry  in  which  antago- 
nism and  unstable  conditions  have  always  obtained. 
From  the  viewpoint  of  the  manufacturer,  it  may  be 
worth  while  to  surrender  part  of  his  authority  and  con- 
trol in  order  to  gain  a  spirit  of  contentment  and  coopera- 
tion in  the  factory. 

82 


LABOR 

Frequent  '*  turnover  "  of  labor  is  the  outward  ex- 
pression of  another  serious  labor  problem.  Manufac- 
turers in  both  small  town  and  city  experience  much 
difficulty  in  holding  competent  operators  of  certain 
standard  and  widely  used  machines,  screw-making  ma- 
chines, milling  machines,  and  so  on.  These  are  men 
above  the  unskilled  in  intelligence,  though  lacking 
exact  knowledge  of  a  trade,  and  therefore  more  sensitive 
to  the  monotony  of  repeat  operations  indefinitely  con- 
tinued. Relief  from  this  monotony  is  denied  usually  by 
factory  conditions  and  the  lack  of  training;  it  is  found 
by  moving  on  to  the  next  city  where  there  is  a  steady 
demand  for  this  kind  of  labor. 

Efforts  to  hold  these  "  floaters,"  usually  most  restless 
in  seasons  of  maximum  production,  have  taken  many 
forms.  Company  "  thrift  clubs  "  and  other  plans  for 
encouraging  and  financing  the  purchase  of  homes  is  one 
avenue  of  approach.  So-called  "  welfare  work  "  de- 
signed to  make  the  factory  more  attractive  from  the 
standpoint  of  comfort,  convenience,  and  social  and 
working  conditions  is  another.  An  eastern  manufac- 
turer comes  closest,  perhaps,  to  the  root  of  the  difficulty 
by  studying  methods  of  restoring  variety  to  the  day's 
work.  Instead  of  putting  through  work  in  quantities  as 
large  as  is  commercially  possible,  he  takes  the  monot- 
ony factor  into  consideration  and  manufactures  in  lots 
small  enough  to  allow  frequent  shifts  to  new  tasks  for 
his  machine  operators.  This  plan,  he  has  found,  reacts 
as  well  on  other  production  difficulties,  lessening  to  a 
large  extent  the  proportion  of  spoiled  parts  in  each 
factory  order. 

With  many  managers,  it  is  a  settled  policy  to  try  by 
other  means  to  hold  workers  who  have  made  their  hon- 

83 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

esty,  industry,  and  good  will  evident  by  service.  Be- 
fore a  man  can  be  paid  off,  even  when  leaving  on  his 
own  initiative,  either  the  manager  or  some  one  in  his 
confidence  has  a  talk  with  the  employee  about  his  mo- 
tives for  leaving.  If  the  reason  is  a  condition  which 
can  be  corrected,  the  change  is  made.  If  a  transfer  to 
another  department  or  another  task  will  remove  the  em- 
ployee's dissatisfaction,  the  change  is  made  whenever 
possible.  In  many  successful  organizations,  indeed, 
discontent  on  the  part  of  the  worker  is  anticipated 
and  it  is  made  one  of  the  chief  duties  of  the  employ- 
ment official  or  department  to  discover  the  capacities, 
ambitions,  and  desires  of  all  workers  and  to  endeavor 
to  place  them,  as  soon  as  practicable,  in  the  positions 
which  will  bring  out  the  fullest  measure  of  their  in- 
terest and  productive  powers. 

After  adjustment  of  the  wage  factor  —  which  may  or 
may  not  include  profit-sharing  —  the  placing  and  train- 
ing of  workers  are  the  two  policies  most  vital  in  the 
building  up  and  holding  of  an  efficient  factory  force. 
Give  a  man  the  work  he  wants  to  do;  help  him  to  fit 
himself  for  its  effective  performance;  pay  him  fairly  for 
what  he  does,  and  the  other  factors  in  the  equation  will 
almost  lose  themselves;  so  strong  is  the  creative,  the 
productive  instinct,  so  real  the  joy  in  doing  the  work 
that  fits. 


84 


CHAPTER  VII 

ORGANIZATION 

OTARTING  with  a  factory,  a  working  force,  and  a 
^  supply  of  raw  materials,  the  manager  faces  a  final 
production  problem,  that  of  effectively  organizing  his 
operating  activities.  He  has  a  definite  end  in  view.  To 
the  smallest  necessary  amount  of  wood,  metal,  clay,  or 
fiber  he  wants  to  add  the  fewest  motions  required  to 
turn  out  a  properly  balanced  unit  of  product.  To  do 
this  he  must  so  coordinate  and  direct  the  application  of 
these  motions  that  there  shall  be  no  duplication  or  loss, 
no  waste  of  time  or  stock  or  energy.  And  he  must  fur- 
ther provide  a  permanent  method  of  controlling  both 
motions  and  materials  in  order  that  this  equilibrium  of 
means  and  results  shall  be  preserved. 

Inefficient  management  involves  either  the  applica- 
tion of  too  much  power  or  labor  to  a  given  unit  of  mate- 
rial, or  the  use  of  too  large  or  too  valuable  a  quantity 
of  raw  stock  in  the  manufacture  of  a  standard  unit  of 
product.  In  flagrant  cases  it  may  mean  that  all  the 
elements  which  enter  directly  into  manufacture  —  ma- 
terial, labor,  power,  machinery,  space,  light,  and  so  on 
—  are  entirely  out  of  proportion  to  the  result  which  is 
obtained.  Efficient  production,  on  the  other  hand,  is 
always  the  consequence  of  establishing  and  maintaining 
a  balance  of  all  the  elements  that  count  in  the  making 
and,  to  a  lesser  degree,  in  the  marketing  of  an  article. 

The  factory  head  must  so  organize  his  plant  and  proc- 

85 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

esses  that  he  can  turn  goods  out  economically.  Yet 
in  his  attention  to  cost  he  must  not  lose  sight  of  qual- 
ity, accuracy,  durability,  beauty,  or  whatever  is  the 
characteristic  which  measures  the  service  to  customers. 
In  the  building  of  machinery,  for  instance,  it  may  be 
possible  to  increase  output  substantially  by  permitting 
small  deviations  from  standards  in  cutting  gears,  ream- 
ing out  bearings,  and  like  finishing  processes.  But  lax- 
ness  in  this  respect  is  almost  certain  to  be  followed  by 
the  development  of  lost  motion  when  the  machine  is 
operated  by  the  purchaser,  and  lost  motion  always 
means  greater  consumption  of  power  and  a  shortened 
life  for  the  machine  itself.  This  inevitably  reacts  on 
sales  and  sometimes  brings  disaster,  as  in  the  recent 
experience  of  a  great  industrial  concern  whose  chief 
product  was  sold  on  long-time  payments. 

In  an  effort  to  bring  output  up  to  a  quota  based  en- 
tirely on  selling  and  financial  considerations,  this  fac- 
tory was  enlarged  and  its  working  force  increased  to  a 
point  where  the  old  plan  of  organization  was  inadequate 
to  insure  efficiency.  Relaxed  or  incompetent  inspec- 
tion allowed  many  faulty  parts  to  be  incorporated  in 
machines.  Tried  out  by  the  purchasers,  so  many  of 
these  were  thrown  back  on  the  agents'  hands  that  the 
company's  reputation  suffered,  a  financial  crisis  fol- 
lowed, and  complete  reorganization  was  necessary  to 
protect  creditors  and  stockholders.  Other  factors,  be- 
sides too  rapid  expansion  of  the  working  force  and 
scamped  workmanship,  undoubtedly  contributed  to  the 
failure.  The  same  emphasis  on  volume  led  to  general 
overselling  by  the  field  force  and  a  breakdown  of  the 
plan  for  financing  deferred  payments  on  orders.  Both 
of  these  weaknesses  might  have  been  corrected,  how- 

86 


ORGANIZATION 

ever,  if  the  plant  had  shipped  standard  and  satisfactory 
machines  to  all  buyers.  It  was  the  flood  of  returns 
which  shook  confidence  in  the  company's  products, 
neutralized  its  selling  efforts,  and  ultimately  destroyed 
its  credit.  Because  its  factory  organization  lost  control 
of  production  and  failed  to  maintain  the  right  ratio  be- 
tween cost,  quality,  and  service,  an  industry  of  almost 
national  scope  collapsed  like  a  house  of  cards. 

Control  of  operations,  then,  is  the  culminating  func- 
tion of  production.  The  man  at  the  head  of  a  small 
plant  has  need  only  of  a  personal  system  or  a  personal 
routine,  perhaps,  which  will  bring  him  into  contact  at 
frequent  intervals  with  all  his  workmen  and  all  the  jobs 
they  are  engaged  on.  If  he  has  a  real  knowledge  of  the 
technical  processes  and  a  certain  amount  of  personality 
—  the  typical  "  one-man  "  business  seems  to  be  built 
largely  on  these  two  elements  —  he  can  at  the  same  time 
control  the  quality  and  cost  of  output,  hasten  pro- 
duction, and  accommodate  it  to  sales  or  financial  exi- 
gencies to  a  degree  which  few  large  businesses  can  hope 
to  equal.  But  when  he  finds  it  necessary  to  delegate 
authority  because  important  details  have  so  multi- 
plied that  he  can  no  longer  handle  all  of  them,  a  more 
formal  organization  becomes  essential  if  his  plant  is  not 
to  lose  efficiency.  As  Alfred  Marshall  senses  it,  the 
crucial  point  in  business  expansion  arrives  when  orders 
must  be  written  instead  of  being  spoken. 

To  keep  control  of  operations  while  delegating  su- 
pervision and  authority  is  the  manager's  broad  prob- 
lem in  organization.  Once  he  has  determined  the  lines 
on  which  the  latter  can  be  divided  and  has  established 
his  underlying  policies  in  accord  with  the  principle  of 
balance  and  the  principle  of  interdependence,  he  can 

87 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

hire  or  train  men  to  whom  he  can  turn  over  the  direc- 
tion and  the  responsibility  of  all  or  nearly  all  his 
operating  activities.  Experience  indicates  that  this  is 
naturally  the  first  step  taken  toward  the  division  of 
labor  in  the  field  of  management.  This,  it  has  already 
been  shown,  is  for  two  reasons :  first,  because  production 
(while  much  is  still  to  be  done)  has  so  largely  been  stand- 
ardized and  so  many  of  its  processes  and  reactions  re- 
duced to  generally  accepted  and  measurable  terms; 
second,  because  classes  of  specialists  have  been  devel- 
oped who  are  competent  to  take  charge  of  operations 
and  hold  them  to  any  predetermined  balance  of  cost, 
quality,  and  service.  When  the  growth  of  his  business 
or  the  initial  size  of  his  undertaking  forces  the  executive 
to  substitute  organization  for  personal  supervision,  then 
it  is  in  the  factory  that  he  finds  it  easiest  and  most 
profitable  to  share  his  functions  and  responsibility  with 
subordinates.  His  problem,  therefore,  is  to  discover 
how  best  to  delegate  his  authority  in  order  to  retain 
effective  control. 

When  he  consults  the  experience  and  practice  of  other 
manufacturers,  he  finds  in  use  three  distinctive  types 
of  shop  organization.  These  differ  in  the  manner  of 
delegating  authority  and  control,  in  the  extent  of  the  re- 
sponsibility fastened  on  individual  executives  and  fore- 
men, and  most  of  all  in  the  philosophy  of  business  which 
informs  them.  Widest  apart  are  (1)  the  line  type  of 
organization  and  (2)  the  functional  type.  Midway  be- 
tween these  and  having  characteristics  in  common  with 
both  is  (3)  the  line-and-staff.  In  considering  which 
kind  of  organization  is  likely  to  prove  most  applicable 
and  most  efficient  in  his  own  factory,  there  is  hardly 
need  to  say  that  the  factors  which  determine  his  choice 

88 


ORGANIZATION 

should  not  be  personal  in  their  nature  or  relations  and 
that  the  decision  should  not  hinge  solely  on  the  man- 
ager's experience  or  familiarity  with  a  particular  type 
of  organization  or  on  the  usage  of  the  district  or  the 
industry  in  which  he  is  engaged. 

In  breaking  up  his  problem  of  organization  into  its 
constituent  problems  and  assembling  the  factors  which 
enter  into  the  solution  of  each,  he  will  find  it  necessary 
to  analyze  and  consider  from  the  viewpoint  of  his  own 
business  the  principles  and  the  working  of  the  three 
types  of  control  just  named.  In  the  line  organization 
—  the  traditional  form,  and  until  our  own  generation 
the  only  common  type  —  the  authority  and  responsi- 
bility are  delegated  throughout.  The  head  of  each  de- 
partment and  sub-department  is  held  responsible  for  all 
that  happens  within  his  jurisdiction.  It  follows  that  his 
functions  are  of  many  kinds  and  large  in  number.  He 
must  hire  his  men,  place  them  where  their  capacities 
will  be  most  useful,  determine  what  is  a  fair  day's  work 
for  each  and  what  payment  should  be  made  for  it,  watch 
his  machines  to  see  that  they  are  in  proper  condition, 
plan  his  work  in  such  a  way  and  keep  material  so  mov- 
ing in  the  shop  that  the  men  and  equipment  are  always 
producing.  He  is  expected  to  be  able  to  show  a  work- 
man how  an  operation  should  be  carried  out  to  secure 
maximum  results  with  the  least  expenditure  of  time 
and  energy,  and  in  an  emergency  to  give  exact  instruc- 
tions for  meeting  it. 

This  list  of  duties,  incomplete  as  it  is,  illustrates  both 
the  advantages  and  disadvantages  of  the  line  type  of 
organization.  It  unifies  work  by  concentrating  author- 
ity and  definitely  fixes  responsibility  upon  certain  in- 
dividuals.    As   the   shop  grows   larger,  however,   the 

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AN  APPROACH  TO  BUSINESS  PROBLEMS 

demands  made  upon  the  foreman's  time,  skill,  intelli- 
gence, and  patience,  increase  to  a  point  where  it  is  diffi- 
cult to  satisfy  them.  He  may  carry  the  hardest  of  his 
problems  up  to  the  superintendent  or  even  to  the  head 
of  the  business,  while  his  responsibility  for  groups  or 
cycles  of  operations  is  frequently  divided  by  putting 
these  in  charge  of  job  or  section  bosses.  But  the  fore- 
man's mental  and  physical  limitations  remain;  and  the 
efficiency  of  the  individual  workman  and  of  the  factory 
as  a  whole  suffers  unless  the  size  of  the  shop  or  the 
special  character  of  the  operations  allows  each  boss  to 
master  the  technical  details  and  oversee  the  perform- 
ance of  all  the  processes  for  which  he  is  held  responsible. 

If  an  industry  is  to  satisfy  these  conditions  and  best 
lend  itself  to  economical  application  of  line  organi- 
zation, it  seems  obvious  that  the  processes  must  be 
virtually  standard  and  continuous,  one  operation  fol- 
lowing another  in  regular  order  and  all  of  nearly  routine 
character,  while  the  machinery  must  be  largely  auto- 
matic. There  must  be  no  extraordinary  demands  upon 
the  intelligence  or  initiative  of  the  foreman  and  his 
duties  must  include  little  outside  keeping  his  men  at 
work,  preserving  discipline,  and  seeing  that  materials  or 
parts  in  process  move  according  to  schedule.  But  in 
factories  where  assembling  operations  form  an  impor- 
tant part  of  the  production  cycle,  the  line  organization 
offers  few  advantages.  It  is  in  the  assembling  indus- 
tries, indeed,  that  the  functional  system  and  the  dif- 
ferent systems  of  line-and-staff  shop  organization  chiefly 
have  been  developed. 

The  functional  system  is  simply  the  application  of  the 
principle  of  the  division  of  labor  to  shop  management, 
while  the  line-and-staff  may  be  considered  either  as  a 

90 


ORGANIZATION 

modified  form  of  the  functional  scheme  or  as  a  grafting 
on  the  traditional  line  organization  of  functional  prin- 
ciples. In  succeeding  chapters  we  shall  see  this  same 
tendency  toward  the  division  of  labor  in  management 
revealing  itself  in  the  gradual  division  of  the  activities  of 
distribution  along  functional  lines,  and  the  unrecorded 
and  almost  unnoticed  development  as  such  of  functional 
middlemen,  lilve  bankers,  insurance  underwriters,  and 
transportation  and  express  companies.  For  the  mo- 
ment, however,  we  are  concerned  only  with  factory 
activities. 

The  first  functional  division  of  production  is  a  sepa- 
ration of  planning  from  performance,  with  the  aim  of 
relieving  the  foremen  of  the  duty  of  arranging  and  rout- 
ing materials  through  the  shops.  A  further  functional 
division  then  takes  place  within  the  planning  depart- 
ment. In  the  Taylor  system  of  management,  which 
is  a  typical  functional  scheme,  the  work  is  divided 
among  an  order-of-work  clerk,  an  instruction-card  man, 
a  time-and-cost  clerk,  and  a  shop  disciplinarian.  The 
names  of  these  foremen,  for  that  is  their  real  rank,  in- 
dicate the  duties  which  each  performs.  Auxiliary  to 
the  planning  department  are  the  time-and-motion- 
study  men,  upon  whose  investigations,  analyses,  and 
experiments  are  based  the  standards  which  govern  all 
the  shop  activities,  whether  these  are  ordered  by  the 
planning  room  or  actually  applied  under  the  eye  of  the 
foreman  in  immediate  charge  of  the  operations. 

The  function  of  the  order-of-work  clerk  is  to  plan  the 
route  which  each  piece  or  lot  of  material  shall  take 
through  the  shop.  But  his  task  is  not  simply  to  indi- 
cate the  sequence  of  the  movements.  He  determines 
what  processes  the  material  shall  pass  through  and  in 

91 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

what  order,  and  maps  his  conclusions  on  route  sheets 
which  illustrate  this  order  graphically  and  chronologi- 
cally. With  these  charts  before  him,  the  instruction- 
card  man  works  out  the  details  of  each  operation,  even 
to  the  particular  machine  and  tool  to  use,  the  speed  to 
be  observed,  and  the  order  in  which  the  cuts  are  to  be 
made.  All  this  from  standards  already  set  by  prelim- 
inary time-and-motion  studies  and  kept  at  hand  for 
instant  reference  in  the  case  of  new  or  unfamiliar  work. 

The  instruction  cards  have  two  purposes:  they  are 
work  orders  for  the  proper  functional  foremen  out  in 
the  shop,  and  they  also  give  exact  directions  for  the 
mechanic  to  follow  in  his  work.  After  the  latter  has 
finished  the  job,  a  return  of  the  time  consumed  in  both 
labor  and  machine-hours  goes  to  the  time-and-cost 
clerk,  whose  function  it  is  to  make  up  the  pay  roll,  in- 
cluding the  bonuses  earned,  and  to  determine  the  cost 
of  each  separate  operation  performed  on  the  job.  Lastly 
there  is  the  shop  disciplinarian  (frequently  the  head  of 
the  planning  room  as  well)  to  deal  with  any  dispute  or 
insubordination  which  the  other  bosses  are  unable  to 
handle  satisfactorily. 

In  direct  contact  with  the  men,  the  machines,  and 
the  work  in  process  are  four  other  functional  foremen, 
the  gang  boss,  the  speed  boss,  the  repair  boss,  and  the 
inspector. 

The  gang  boss  is  more  a  teacher  than  an  executive. 
It  is  his  part  to  interpret  the  planning  room's  instruc- 
tions on  unfamiliar  work,  to  demonstrate  if  necessary 
the  standard  way  of  carrying  on  the  process  as  indi- 
cated on  the  instruction  card,  and  to  continue  this 
demonstration  and  supervision  until  the  workman  is 
able  to  turn  out  the  job  in  the  standard  time.,  More- 

92 


ORGANIZATION 

over,  on  familiar  or  repeat  operations  in  which  the 
workman  is  likely  to  lose  interest  and  efficiency,  it  is 
the  duty  of  the  gang  boss  to  hold  him  to  the  efficiency 
level  where  he  will  earn  his  own  bonus,  and  allow  the 
gang  boss  to  earn  the  premium  gained  when  his  group 
makes  more  than  a  specified  minimum  of  individual 
bonuses.  No  need  to  say  that  the  workman's  bonus  is 
an  imperative  part  of  the  functional  system  of  man- 
agement; without  such  an  incentive  to  effort,  the  eflS- 
ciency  level  could  not  be  permanently  maintained. 

The  function  of  the  speed  boss  is  to  see  that  every 
machine  moves  at  the  exact  speed  called  for  by  the 
instruction  card.  This  indicated  speed  is  the  one  which 
has  been  shown  to  be  the  most  effective  in  the  tests  and 
experiments  carried  on  when  this  particular  operation 
was  submitted  to  time-and-motion  studies  and  thus 
standardized  for  all  future  repetitions.  The  business  of 
the  repair  boss,  naturally,  is  to  keep  all  machines,  tools, 
power  transmissions,  and  the  like  in  such  perfect  order 
that  processes  can  be  performed  in  the  standard  times. 
The  inspector,  last  of  the  four  shop  bosses,  has  jurisdic- 
tion over  the  manner  of  performing  the  different  opera- 
tions as  well  as  over  the  finished  results.  The  idea  here 
is  to  prevent  mistakes  rather  than  to  penalize  them  by 
rejecting  parts  or  assemblies  which  fall  below  specifi- 
cations. 

In  some  plants,  where  modified  forms  of  functional 
management  are  in  use,  the  work  of  the  speed  boss  is 
assumed  by  the  gang  boss  or  instructor.  Sometimes, 
too,  the  repair  boss  and  inspector  have  diminished  func- 
tions and  the  gang  boss  is  restored  to  much  the  same 
authority  as  that  which  he  holds  under  line  organiza- 
tion.  It  is  here,  indeed,  that  the  line-and-staff  system 

93 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

emerges  as  a  virtual  compromise  between  line  and  func- 
tional management.  Keeping  the  line  organization  to 
supervise  operation,  a  staff  of  technical  experts  is  added 
to  analyze  every  factor  and  detail  in  production  — 
materials,  machines,  methods,  routing,  arrangement, 
and  the  like  —  to  determine  standards  for  each  of  these 
and  to  secure  the  adoption  of  these  standards  by  the 
officers  of  the  regular  line  organization. 

In  every  sense  of  the  word,  these  specialists  are  func- 
tional foremen  who  do  not  come  into  direct  contact 
with  the  working  force  except  when  they  are  making 
their  time-and-motion  studies  of  processes,  or  demon- 
strating the  standard  methods  of  performing  an  op- 
eration. The  greatest  advantage  of  the  line-and-staff 
system,  perhaps,  is  that  a  beginning  can  be  made  in 
the  betterment  of  shop  practice  without  disturbing  the 
regular  factory  organization  and  that  the  betterments 
can  be  carried  forward  at  whatever  rate  the  manager 
deems  advisable.  In  this  it  differs  from  functional 
management,  the  advocates  of  which  declare  that  it 
must  be  adopted  or  rejected  as  a  whole.  Both  systems 
are  as  one  in  insisting  on  the  bonus  method  of  wage 
payment,  a  factor  in  efficiency  which  was  discussed  at 
some  length  in  the  previous  chapter. 

To  the  business  man  approaching  the  subject  of  func- 
tional management  from  the  outside,  the  apparent 
amount  of  clerical  work  required,  the  opportunities 
offered  for  mistakes  and  for  the  shifting  of  responsi- 
bility, the  amount  of  preparatory  work  demanded,  and 
the  long  interval  before  marked  results  can  be  expected 
should  not  be  absolute  deterrents.  Functional  man- 
agement, unabridged,  may  be  beyond  the  present  scale 
or  needs  of  his  business  as  he  is  conducting  it  or  pro- 


ORGANIZATION 

posing  to  start  it.  But  the  principle  behind  both  the 
functional  and  the  line-and-staff  systems  of  manage- 
ment —  the  finding  and  using  of  the  "  one  right  way  " 
under  present  conditions  of  doing  things  —  cannot  be 
ignored  if  his  business  is  to  meet  competition  grounded 
on  this  fundamental  of  efficiency. 

In  this  discussion  of  production  little  attention  has 
been  given  to  strictly  intra-departmental  problems. 
As  suggested  in  earlier  chapters,  plant  and  operating 
activities  are  relatively  well  organized,  and  technically 
trained  factory  experts  are  available  to  carry  the  burden 
of  these  internal  problems.  The  purpose,  indeed,  has 
been  less  to  outline  the  policies  of  production  and  the 
principles  on  which  they  are  based  than  to  suggest  in  a 
known  and  standardized  field  a  logical  classification  of 
the  activities  of  business  and  to  illustrate  how  a  syste- 
matic approach  may  be  applied  to  the  problems  dis- 
closed as  the  classification  develops. 


95 


PART  II 
THE  PROBLEMS  OF  DISTRIBUTION 


CHAPTER  VIII 

DEMAND  CREATION  AND  PHYSICAL  SUPPLY 

WHEN  economic  life  was  organized  on  a  basis  of 
barter,  both  traders  inspected  and  took  over 
the  actual  goods  involved  before  the  transaction  was 
complete.  One  or  the  other  carried  his  surplus  of 
food  or  skins  or  weapons  to  the  point  where  the  second 
man  had  need  of  it  and  a  store  of  some  desirable  thing 
to  exchange  for  it.  Or  both  transported  their  merchan- 
dise to  a  recognized  market  place  where  the  bargain  was 
made  and  the  transfer  effected.  For  a  long  time,  indeed, 
after  the  first  broad  division  of  labor  along  functional 
lines  had  brought  the  merchant  into  existence  and  the 
evolution  of  a  medium  of  exchange  or  "  money  econ- 
omy "  had  displaced  barter,  the  buyer  had  personal  con- 
tact with  his  purchases  at  all  stages  of  the  transaction 
and  viewed,  handled,  and  tested  them  before  assuming 
possession. 

This  was  distribution  in  its  simple  phase  —  literally, 
the  application  of  motion  to  change  the  place  and  owner- 
ship of  material  which  production  had  already  changed 
in  forvi.  The  two  chief  functions  of  marketing,  de- 
mand creation  and  physical  supply  of  the  merchandise, 
were  all  but  performed  simultaneously.  There  was 
no  necessity  of  distinguishing  between  them  or  of  con- 
sidering their  activities  separately,  since  the  sale  proper 
and  the  delivery  of  the  goods  merged  into  one  operation. 

Development  of  the  range  and  means  of  distribution 

99 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

however,  has  enlarged  the  origmal  scope  of  these  two 
functions.  Each  has  given  rise  to  a  distinct  group  of 
related  activities,  with  corresponding  problems  for  the 
man  who  must  coordinate  and  control  them.  The 
primitive  producer  solved  all  problems  when  he  con- 
veyed his  cattle  or  corn  or  tanned  skins  to  the  market 
place.  For  the  most  part,  his  goods  were  common  util- 
ities, mere  sight  of  which  stirred  desire  for  ownership, 
even  among  those  already  adequately  supplied.  Under 
normal  conditions,  therefore,  he  was  sure  of  a  market 
at  the  prevailing  market  price.  If  this  were  unsatis- 
factory, he  could  take  his  merchandise  home  again  and 
wait  for  a  more  favorable  occasion. 

The  problem  of  distribution  to-day  is  more  complex. 
Broadly  speaking,  it  divides  into  two  sub-problems 
closely  related  and  interdependent  but  each  having  to 
do  with  a  different  set  of  factors  and  reactions.  The 
first  takes  shape  in  the  question:  Given  a  particular 
article,  how  can  a  demand  for  it  be  created  of  sufficient 
volume  to  make  its  production  and  distribution  projBt- 
able.^*  The  second  is:  Through  what  channels  can  the 
article  itself  be  conveyed  from  the  factory  warehouse, 
where  it  is  of  least  value,  into  the  hands  of  those  con- 
sumers who  will  pay  the  most  profitable  price  for  it, 
though  this  price  may  not  be  the  highest  at  which  a 
more  limited  volume  could  be  sold.'* 

The  activities  of  demand  creation  focus  on  the  con- 
sumer. Their  purpose  is  to  communicate  to  his  mind 
such  ideas  about  the  product  as  will  arouse  desire  for  it 
and  cultivate  willingness  to  pay  the  price  and  make  the 
effort  required  to  secure  possession  of  it.  This  aroused 
demand  would  have  no  commercial  or  economic  value, 
however,  unless  provision  were  made  for  satisfying  it  by 

100 


DEMAND  CREATION  AND  PHYSICAL  SUPPLY 

actual  transfer  of  the  goods  to  the  consumer  through 
one  or  more  of  the  agencies  available. 

The  relations  between  the  activities  of  demand  crea- 
tion and  of  physical  supply,  in  fact,  illustrate  again  the 
persistence  of  the  two  principles  of  interdependence  and 
of  balance.  Failure  to  coordinate  any  one  of  these  ac- 
tivities with  its  group-fellows  and  also  with  those  in 
the  other  group,  or  undue  emphasis  or  outlay  put  upon 
any  one  of  these  activities,  is  certain  to  upset  the  equi- 
librium of  forces  which  means  efficient  distribution. 
Nor  must  it  be  forgotten,  in  organizing  these  activities 
and  establishing  the  policies  which  shall  guide  them, 
that  both  groups  present  situations  which  involve  the 
production  activities  discussed  in  previous  chapters  and 
the  activities  of  administration  to  be  taken  up  in  an- 
other section  of  this  book. 

In  approaching  the  problems  of  distribution,  greater 
consideration  must  be  given  by  the  manager  to  strictly 
departmental  policies  than  was  necessary  in  dealing 
with  production.  In  the  first  place,  the  standardization 
of  processes  and  materials,  which  has  been  carried  to 
such  length  in  the  factory,  has  hardly  touched  the  ma- 
jor operations  of  distribution.  Relatively  little  progress 
has  been  made,  for  instance,  in  observing  and  compiling 
the  essential  facts  about  demand  creation,  in  classifying 
them,  coordinating  them,  and  establishing  their  mutual 
relations;  and  in  tracing  and  defining  the  broad  tend- 
encies and  principles  which  analysis  of  a  sufficient  num- 
ber of  cases  would  disclose. 

It  is  true  that  many  intensive  studies  have  been  made 
of  various  functions,  processes,  and  reactions  concerned 
with  distribution.  But  these  investigations  generally 
have  been  made  from  the  viewpoint  of  a  single  business 

101 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

or  a  group  of  similar  businesses.  They  have  concen- 
trated in  the  main  on  promising  territories  and  avoided 
those  where  the  chances  were  unfavorable.  And  as  a 
consequence,  the  results  are  so  subject  to  qualification 
that  few  significant  rules  capable  of  general  application 
have  been  formulated.  Promising  beginnings  have  been 
made  —  the  investigation  of  retail  selling  by  the  Bureau 
of  Business  Research  at  Harvard  University,  the  exper- 
iments conducted  by  the  schools  of  commerce  at  various 
universities,  the  constant  gathering,  sifting,  and  organ- 
izing of  practical  methods  by  business  magazines,  the 
trade  press  and  trade  associations.  By  comparison  with 
the  work  yet  to  be  done,  however,  they  are  only  begin- 
nings, trial  efforts  valuable  chiefly  because  they  point 
the  way  and  demonstrate  the  feasibility  of  an  adequate, 
organized  study,  perhaps  under  the  national  govern- 
ment's leadership,  of  all  the  activities  of  business. 

The  present  lack  of  standards  is  due  largely  to  the 
diflSculty  of  analyzing  a  structure  so  intricate  as  our 
system  or  distribution,  complicated  further  by  geo- 
graphical, seasonal,  and  other  physical  conditions,  and 
by  the  presence  of  the  changing  human  factor  in  every 
individual  transaction.  Consider,  for  a  moment,  how 
many  and  various  are  the  elements  presented  by  the 
United  States  as  a  consuming  market.  Here  are  about 
one  hundred  million  people  distributed  over  an  area 
of  more  than  three  million  square  miles.  Some  are 
gathered  in  the  large  cities,  where  millions  jostle  elbows. 
Some  are  scattered  over  great  areas  with  considerable 
distances  between  them  and  their  neighbors.  Some 
daily  pass  hundreds  of  retail  stores;  some  must  ride 
miles  to  reach  the  nearest  store.  Wide  extremes  in  pur- 
chasing power  exist.   Millions  have  a  purchasing  power 

102 


DEMAND  CREATION  AND  PHYSICAL  SUPPLY 

barely  sufficient  to  obtain  for  themselves  the  necessi- 
ties of  life.  A  few  can  satisfy  the  most  extravagant 
whims  of  the  imagination.  Between  these  extremes  lie 
all  degrees  of  purchasing  power,  the  number  in  each 
class  becoming  greater  as  you  descend  in  the  scale  of 
purchasing  power. 

Their  desires  are  as  varied  as  their  purchasing  power. 
Besides  the  great  colonies  of  immigrant  folk  in  every 
large  city  —  Poles,  Bohemians,  Hungarians,  Italians, 
Scandinavians,  and  Russian  Jews,  each  race  with  trans- 
planted tastes  and  standards  and  a  language  barrier  to 
make  more  difficult  the  approach  —  the  native-born 
consumers  present  a  complex  problem,  with  environ- 
ment, education,  social  customs,  individual  habits,  and 
all  the  variations  of  body  and  mind  tending  to  make 
their  wants  diverse. 

In  each  individual  certain  conscious  needs  are  con- 
stantly gratified  by  the  purchase  of  goods  produced  for 
such  gratification.  Then  there  are  the  conscious  needs 
which  go  ungratified  because  of  the  limitations  upon 
buying  power  and  the  necessity  of  satisfying  other  needs 
of  greater  felt  importance.  And  finally,  there  are  the 
unrecognized  needs  which  fail  of  expression  because  the 
individual  is  ignorant  of  the  existence  of  goods  which 
would  gratify  them.  Twenty  years  ago,  to  illustrate, 
there  existed  in  the  farmer,  far  from  a  barber  shop  and 
clumsy  of  touch,  an  unformulated  need  for  a  safety 
razor.  To-day  a  score  of  manufacturers  bring  to  his 
attention  the  existence  of  such  devices  and  the  recog- 
nized need  finds  expression  in  efiFective  demand. 

The  existing  system  of  distribution  was  built  up  along 
the  line  of  least  resistance,  aiming  always  at  the  satis- 
fying of  known  wants.    As  suggested  in  a  previous 

103 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

chapter,  the  capacity  of  the  market  to  absorb  goods 
has  generally  exceeded  the  ability  of  manufacturers 
to  produce  them.  This  at  least  was  true  from  the 
introduction  of  power-driven  machinery  into  English 
industry  until  the  closing  decades  of  the  nineteenth 
century.  Pressure  of  demand  made  it  unnecessary  for 
the  business  man  to  devote  his  time  to  searching  out 
unformulated  needs.  Only  in  recent  years,  when  the 
development  of  production  has  potentially  outstripped 
the  available  market  and  shifted  the  emphasis  to  distri- 
bution, has  the  manufacturer-merchant  become  a  pio- 
neer on  the  frontier  of  human  desires  and  needs. 

To-day  the  progressive  business  man  makes  careful, 
intensive  studies  not  merely  of  the  consumer's  recog- 
nized wants  but  of  his  tastes,  his  habits,  his  tendencies 
in  all  the  common  activities  and  relations  of  life.  This 
he  does  in  order  to  track  down  unconscious  needs,  to 
manufacture  goods  to  satisfy  them,  to  bring  these 
products  to  the  attention  of  the  consumer  in  the  most 
appealing  ways,  and  finally  to  complete  the  cycle  by 
transporting  the  goods  to  him  in  response  to  an  expressed 
demand.  His  problem  is  chiefly  one  of  adjustment.  He 
must  bend  the  materials  and  forces  of  nature  to  the  end 
of  human  service.  And,  most  diflScult  task  of  all,  he 
must  shape  his  making  and  selling  policies  alike  to  sat- 
isfy contradictory  conditions  and  methods  and  to  em- 
ploy without  waste  the  divergent  and  overlapping  agen- 
cies through  which  present-day  distribution  is  carried  on. 
In  marketing  identical  products  and  appealing  to 
identical  classes  of  consumers,  for  instance,  no  one 
method  of  sale  is  recognized  as  the  right  or  the  most 
profitable  way.  Sale  by  bulk,  sale  by  sample,  and  sale  by 
description  are  often  carried  on  for  the  same  commod- 

104 


DEMAND  CREATION  AND  PHYSICAL  SUPPLY 

ities,  at  the  same  time,  by  the  same  organizations.  Not 
from  choice,  certainly,  nor  from  lack  of  thought  put 
upon  the  question  of  simplifying  the  problem  of  creat- 
ing demand  and  supplying  it.  But  rather  because,  with 
a  few  exceptions,  the  gathering  of  the  necessary  informa- 
tion, the  analyzing  of  the  data  secured,  and  the  building 
up  of  a  standard  method  of  marketing  which  would 
satisfy  all  the  conditions,  is  a  task  beyond  the  resources 
of  any  but  the  greatest  of  our  businesses. 

Sale  by  bulk  goes  back  to  the  first  dim  beginnings  of 
trade  —  the  barter  of  a  rude  stone  ax,  perhaps,  for  an 
ill-tanned  deerskin  beside  the  tribal  campfire.  It  per- 
sists in  all  the  stages  of  advancement  and  occasional 
retrogression  through  which  commerce  and  civilization 
have  come  together  —  when  buyers  and  sellers  met 
personally  at  the  market  places  or  fairs,  when  the  trav- 
eling artisan  went  to  the  home  of  his  customer  and  there 
constructed  the  cart  or  chair  or  coat  of  which  the  latter 
stood  in  need;  when  shops  were  set  up  in  the  towns  and 
the  situation  was  reversed,  the  customer  seeking  the 
seller.  The  significant  factor  in  the  process  was  the 
same  in  all  cases,  however.  There  was  personal  contact 
and  the  buyer  saw  the  actual  goods  which  he  was  asked 
to  purchase. 

Later  came  sale  by  sample,  where  the  customer  ex- 
amined and  judged,  not  the  actual  goods  to  be  re- 
ceived, but  a  sample  which  the  merchant  guaranteed  to 
be  similar  in  type  and  equal  in  quality  and  in  every 
other  essential  respect  to  the  product  which  he  would 
deliver.  The  development  of  this  method  of  sale  was 
dependent  on  progress  in  several  apparently  unrelated 
directions.  New  manufacturing  methods  made  possi- 
ble a  standardization  of  product  as  the  market  widened. 

105 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

It  was  possible  to  produce  substantially  identical  arti- 
cles in  large  quantities.  Grades  and  standards  thus 
could  be  established.  At  the  same  time  there  came  into 
being  the  higher  code  of  commercial  ethics  necessary 
to  the  extension  of  sale  by  sample.  For  the  purchaser 
must  have  confidence  not  only  in  the  ability  of  the 
producer  to  furnish  goods  identical  with  the  sample, 
but  also  in  his  intention  to  do  so. 

In  sale  by  description,  the  purchaser  does  not  see 
even  a  sample  of  the  goods.  Instead,  ideas  about  the 
goods  are  communicated  to  him  by  the  distributer 
through  the  use  of  salesmen  (his  own  or  those  of  mid- 
dlemen), advertising,  catalogues,  booklets,  or  letters. 
Spoken,  WTitten,  or  printed  symbols  take  the  place  of 
the  sight  of  the  goods  themselves  or  a  sample  of  them. 
The  use  of  the  term  "  sj^mbols  "  rather  than  "  words  " 
is  necessitated  hy  the  fact  that  photographs  and  draw- 
ings to-day  are  important  factors  in  sale  by  description. 
For  a  picture  of  the  commodity  is  frequently  able  to 
convey  to  a  prospective  purchaser  a  more  vivid  im- 
pression of  the  product  than  could  pages  of  verbal 
description.  In  the  case  of  complicated  machinery,  in- 
deed, the  blueprint,  with  exact  dimensions  set  down 
and  the  exact  relations  between  parts  made  plain,  is 
used  to  supplement  and  make  clearer  the  conception 
which  the  engineer  purchaser  acquires  by  examination 
of  the  machine  itself. 

Sale  by  description  demands  a  still  higher  plane  of 
business  conduct  than  is  required  for  sale  by  sample  as 
well  as  a  higher  level  of  general  intelligence.  The  pur- 
chaser must  have  enough  of  understanding  and  imag- 
ination to  grasp  ideas  conveyed  either  through  spoken, 
written,  or  printed  symbols  and  to  visualize  the  article 

106 


DEMAND  CREATION  AND  PHYSICAL  SUPPLY 

described  and  its  projected  effect  on  his  own  business  or 
pleasure.  In  the  backward  community,  where  educa- 
tion is  at  a  low  level,  sale  in  bulk  and  sale  by  sample 
must  continue  as  the  chief  method  of  distribution.  In 
a  sense,  therefore,  sale  by  description,  whatever  its  be- 
ginnings, is  in  its  modern  application  a  by-product  of 
the  public  school  and  of  the  printing  press. 

At  this  stage  of  progress  in  selling  methods,  too,  the 
distinction  between  the  demand-creating  and  the  de- 
mand-supplying functions  of  the  distributor  becomes 
obvious.  Barter  is  largely  the  matching  of  wits  and 
commodities  by  the  two  participants;  demand  creation 
and  actual  supply  are  merged  in  the  minds  of  both. 
But  in  sale  by  sample  and  sale  by  description  the  line 
of  division  is  clear.  The  functions  are  differentiated 
and  can  readily  be  distinguished. 

The  ideas  to  be  conveyed  to  the  prospective  pur- 
chaser in  sale  by  description  are  such  as  will  awaken 
an  effective  desire  for  the  product  thus  exploited.  The 
arousing  of  desire  is  the  essential  element  in  selling, 
though  the  distributor  has  the  further  task  of  providing 
machinery  for  the  meeting  of  the  resultant  demand. 
He  must  make  his  goods  physically  available  to  the 
buyer.  In  sale  by  bulk,  this  activity  merges  with  sell- 
ing, since  the  goods  are  physically  present  when  the 
sale  is  made.  In  sale  by  sample  and  sale  by  description, 
the  physical  distribution  of  the  goods  is  a  problem  dis- 
tinct from  the  creation  of  demand,  though  it  is  one 
which  must  be  considered  at  every  step  in  any  solution 
arrived  at. 

All  three  methods  of  sale,  however,  are  in  use  in 
modern  trading.  The  consumer  still  purchases  a  large 
part  of  the  commodities  he  uses  under  conditions  which 

107 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

make  them  sales  in  bulk.  He  views  and  inspects  the 
goods  in  a  retail  store  before  he  buys  them,  though 
thousands  of  farmers  and  small-town  folk  depend  for 
their  supplies  on  mail-order  concerns,  which  sell  by  de- 
scription. The  middleman,  buying  in  larger  quantities, 
generally  purchases  from  samples,  often  manufactured 
singly  or  in  small  lots  long  before  the  season  of  sale  to 
consumers  begins.  This  is  the  rule  also  with  products 
classed  as  specialties  —  vacuum  cleaners,  cash  registers, 
coJBFee  percolators,  and  a  thousand  other  products  which 
need  a  demonstration  to  clinch  the  prospective's  desire 
to  possess  them  for  the  sake  of  utility  value.  To  be 
sure,  this  difficulty  has  been  solved  in  part  by  the  exten- 
sion of  the  approval  system.  But  sale  by  description 
becomes  each  year  of  increasing  importance  in  every 
phase  of  distribution.  Even  where  the  purchaser  ex- 
amines a  sample  or  the  merchandise  itself  before  the 
sale  is  concluded,  the  earlier  steps  in  the  creation  of  in- 
terest and  desire  probably  have  been  by  means  of 
description. 

In  marketing  motor  cars,  for  instance,  sale  by  sample 
is  the  method  most  generally  used.  Demonstration  cars 
are  shown  at  the  agencies  and  at  the  annual  automobile 
shows  held  throughout  the  country  —  modern  equiva- 
lents in  a  single  line  of  the  medieval  fairs  —  and  orders 
are  taken  for  future  deliveries.  Early  in  each  successive 
season  orders  are  frequently  booked,  however,  before 
the  new  model  has  been  completed,  the  customer  buying 
on  the  designer's  specifications  for  both  chassis  and 
body,  backed  up  of  course  by  the  manufacturer's  repu- 
tation for  turning  out  efficient  and  beautiful  machines. 
This  is  nothing  more  or  less  than  sale  by  description, 
since  extensive  magazine  and  newspaper  advertising 

108 


DEMAND  CREATION  AND  PHYSICAL  SUPPLY 

campaigns  (sale  by  description,  again)  contribute  not 
a  little  to  the  prestige  of  the  leading  cars  and  unques- 
tionably stir  the  desire  to  possess  a  motor,  which  is  the 
genesis  of  every  purchase  made.  Finally,  when  the 
driving  season  is  under  way  and  the  agency  is  stocked 
up  with  machines  manufactured  and  delivered  during 
the  winter  and  early  spring,  hundreds  of  buyers  give 
their  orders  after  examining  the  cars  and  participating 
in  a  road  test  of  the  identical  cars  which  are  to  be  deliv- 
ered to  them.  It  may  fairly  be  said,  therefore,  that  the 
automobile  industry,  barely  twenty  years  old  as  yet, 
uses  all  the  methods  of  sale  which  have  been  developed 
through  many  centuries  in  the  marketing  of  staples. 

This  evolution  in  the  mechanics  of  distribution  is 
graphically  shown  in  Chart  I  (page  165).  Though  the 
diagram  summarizes  the  changes  which  have  taken 
place  in  marketing  methods,  it  does  not  tell  the  whole 
story.  The  forces  behind  the  advances  made  are  not 
to  be  overlooked.  The  higher  standard  of  business 
ethics  —  what  Veblen  has  called  "  mitigations  of  the 
maxim.  Caveat  emptor  "  ^  —  has  meant  a  growth  in 
public  confidence.  The  factory  system  and  machine 
processes  have  made  possible  a  high  degree  of  stand- 
ardization, distinct  differentiation  of  quality,  and  a 
volume  of  production  which  has  lowered  factory  costs 
and  thus  brought  innumerable  articles  within  reach  of 
wider  circles  of  consumers. 

Most  important,  perhaps,  have  been  the  improve- 
ments in  the  means  of  communication.  The  develop- 
ment of  the  steamship,  the  railroad,  the  telegraph,  the 
telephone,  and  the  post  office  have  opened  virtually 
an  unlimited  market  to  the  individual  business  man. 

^  Thorstein  Veblen,  "  The  Theory  of  Business  Enterprise." 
109 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

And  this  has  meant  further  division  of  labor  in  market- 
ing and  further  differentiation  of  functions.  In  fact, 
speciahzed  institutions  have  grown  up,  concerned  with 
finance,  transportation,  insurance,  and  other  sales  func- 
tions originally  assumed  by  the  merchant  producer 
himself,  but  now  surrendered  to  groups  of  what  may  be 
termed  functional  middlemen. 

Broadly,  then,  the  problem  of  distribution  is  to  bring 
about  an  effective  adjustment  between  demand  crea- 
tion and  economical  supply,  to  arouse  the  desired  maxi- 
mum of  demand  at  a  minimum  of  expense,  and  to  supply 
without  leakage  the  largest  possible  percentage  of  this 
demand.  The  second  phase  of  the  problem  involves 
the  elements  of  time,  convenience,  and  service.  If  the 
demand  which  has  been  aroused  among  consumers  is 
to  be  fully  utilized,  it  must  be  possible  for  them  to  ob- 
tain the  goods  promptly  and  without  undue  effort  at  the 
moment  when  the  demand  shows  itself.  In  many  cases 
certain  collateral  services  must  be  provided,  such  as 
instruction  in  their  use,  subsequent  repairs,  and  the  like. 
If  the  consumer's  interest  and  desire  to  try  a  certain 
food  product  have  been  stimulated  through  an  adver- 
tising campaign,  but  the  product  itself  is  not  to  be  had 
at  a  convenient  grocery  store  when  the  buying  impulse 
is  at  its  strongest,  the  resulting  leakage  of  demand,  if  it 
is  at  all  general,  is  bound  to  defeat  the  manufacturer's 
purpose. 

Not  a  few  costly  failures  in  distribution  campaigns 
have  been  due  to  such  a  lack  of  coordination  between 
demand  creation  and  physical  supply,  to  the  producer's 
neglect  either  to  provide  stocks  of  his  commodity  at 
points  easy  of  access  to  the  consumer  or  to  enlist  to  the 
same  end  the  interest  and  the  cooperation  of  the  mid- 
110 


DEMAND  CREATION  AND  PHYSICAL  SUPPLY 

dlemen  who  are  the  usual  sources  of  supply.  Instead 
of  being  a  subsequent  problem,  this  question  of  supply 
must  be  met  and  answered  before  the  work  of  demand 
creation  begins;  otherwise  the  leakage  may  endanger 
the  result.  Middlemen  do  not  cover  all  fields  efficiently. 
The  branch  house  or  store  is  an  expensive  undertaking. 
An  exclusive  sales  force  means  a  constant  outlay.  Mail 
orders  and  direct  shipments  are  effective  only  in  distrib- 
uting certain  kinds  of  merchandise  and  in  reaching 
certain  sections  and  classes  of  consumers. 

The  supply  plan  adopted  may  use  only  one  of  these 
agencies;  it  may  employ  all.  In  any  case,  it  must  cor- 
respond with  and  serve  the  districts,  the  social  strata,  or 
the  special  classes  of  consumers  at  which  the  selling 
appeals  are  directed.  It  follows,  as  a  corollary,  that  the 
demand-creation  campaign  must  likewise  be  shaped  to 
fit  the  available  facilities  of  demand  supply  —  another 
outcropping  of  the  principles  of  interdependence  and 
of  balance.  Otherwise  there  is  waste  through  over- 
stimulation of  demand  where  no  adequate  or  economi- 
cal means  have  been  provided  to  satisfy  it,  and  this 
means  a  proportionate  increase  in  the  burden  of  dis- 
tribution expense. 

The  consumer  pays,  of  course.  Yet  it  is  neither  sound 
business  nor  ethical  business  that  the  price  of  any  com- 
modity or  service  should  be  loaded  with  the  cost  of 
duplicate  or  unnecessary  functions  or  of  any  other  pre- 
ventable leakage  or  waste.  Stripped  down  to  essentials, 
a  business  succeeds  only  as  it  serves.  Unless  it  adds  to 
the  sum  of  human  happiness  or  comfort  or  progress 
something  which  no  other  activity  or  agent  can  supply 
so  cheaply  or  so  well,  its  end  is  forecast;  a  more  efficient 
competitor  is  building  to  take  its  place. 

Ill 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

On  the  other  hand,  each  access  of  value,  each  price 
reduction  made  feasible  by  the  elimination  of  lost  mo- 
tions, widens  the  market  of  the  article,  brings  it  another 
degree  nearer  the  status  of  a  necessity  for  daily  use  or 
consumption  by  the  multitude.  Forty  years  ago  —  to 
take  one  instance  in  a  thousand  offering  —  a  woven 
wire  mattress  ranked  as  a  luxury,  costing  fifteen  dollars 
at  wholesale,  ten  days'  pay  for  the  man  who  constructed 
it.  Now  a  better  mattress,  machine  made,  is  sold  to 
dealers  for  eighty-five  cents  and  no  day  laborer  can 
find  a  cheaper  substitute.  Similar  achievements  in 
organization,  in  invention,  in  ceaseless  pruning  of  ex- 
pense and  adaptation  of  materials,  have  driven  soaps, 
collars,  cottons,  kerosenes,  books,  furniture,  and  an 
endless  list  of  other  things  down  from  the  plane  of  semi- 
luxuries  to  facilitate  and  enrich  our  daily  life. 


112 


SECTION  I 
DEMAND  CREATION 


CHAPTER  IX 

LOCATION,  CONSTRUCTION,  AND  EQUIPMENT 
OF  THE  PLANT 

ALL  the  activities  of  distribution,  we  have  seen, 
have  to  do  \sdth  the  two  functions  of  demand 
creation  and  physical  supply.  If  we  apply  to  each 
group  the  same  systematic  approach  used  in  our  anal- 
ysis of  production,  an  interesting  parallel  is  developed. 
In  both  groups,  we  find,  there  are  plant  and  operating 
policies  to  be  determined.  Further,  the  plant  policies 
are  governed,  as  in  production,  by  the  factors  involved 
in  location,  construction,  and  equipment;  while  the 
operating  policies  are  shaped  by  considerations  bearing 
on  materials,  agencies  (grouped  labor),  and  organiza- 
tion. This  is  true  broadly  of  both  demand  creation  and 
physical  supply.  The  parallel  may  not  extend  to  all  the 
factors  involved  in  either  case.  Our  knowledge  of  distri- 
bution does  not  carry  far  enough  to  say  definitely  what 
are  all  the  factors.  But  at  least  the  analysis  will  be 
suflBciently  complete  to  give  direction  to  this  discussion. 

The  problem  of  demand  creation  may  be  stated  sim- 
ply: How  shall  we  transmit  to  the  possible  consumer 
such  ideas  about  the  goods  we  have  to  sell  as  will  arouse 
a  maximum  demand  for  them  at  a  minimum  expense, 
present  and  future  sales  both  being  considered  .^^ 

Starting  with  the  plant  activities,  as  in  our  analysis  of 
production,  we  find  that  we  have  to  deal  with  the  loca- 
tion, construction,  and  equipment  of  the  "  plant  "  for 

115 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

demand  creation  —  in  other  words,  the  quarters  for 
the  sales  department  and  such  other  departments  as 
contribute  directly  or  indirectly  to  the  work  of  de- 
mand creation.  Like  all  other  general  business  prob- 
lems, that  of  location  proves  to  be  a  complex  of 
several  sub-problems.  At  least  four  simple  solutions 
are  found  to  be  common  practice:  the  sales  plant 
may  be  at  the  factory,  at  the  largest  neighboring  city, 
at  the  largest  trade  market,  at  the  chief  city  of  the 
country.  Still  another  recognized  plan  combines  a 
central  sales  plant  at  one  of  these  locations,  with  auxil- 
iary district  or  branch  organizations,  each  of  which 
concentrates  on  the  peculiar  distribution  problems  of 
its  own  territory.  Quite  as  successful  campaigns  have 
been  conducted  from  one  location  as  from  another;  off- 
hand choice  of  any  one  of  them,  therefore,  without  study 
of  the  comparative  advantages  offered  by  the  others, 
would  be  shortsighted  and  possibly  ineffectual.  For 
there  are  definite  factors  governing  the  placing  of  the 
sales  departments  which  should  be  recognized  and 
weighed  by  the  management  before  a  decision  is  made. 

To  reduce  the  problem  to  concrete  form,  let  us  con- 
sider the  location  of  the  selling  plant  of  a  company  mak- 
ing furniture  in  a  small  town  in  southern  Michigan. 
Taking  the  first  step  in  our  systematic  approach  and 
eliminating,  or  at  least  recognizing,  the  personal  equa- 
tion, it  is  obvious  that  the  placing  of  the  sales  depart- 
ment should  be  influenced  principally  by  the  marketing 
needs  of  the  business. 

Personal  conveniences  should  not  dictate  its  location 
at  the  factory;  nor  should  prejudices  or  prepossessions 
be  allowed  to  weight  the  decision.  The  ambition  of  the 
owner's  wife  or  family  to  exchange  life  in  a  country 

116 


LOCATION,CONSTRUCTION,  AND  EQUIPIVIENT 

town  for  the  greater  social  opportunities  of  New  York 
or  Chicago  should  count  for  no  more  in  fixing  the  loca- 
tion at  either  point  than  should  personal  associations  or 
the  traditions  of  the  trade  tip  the  scale  in  favor  of  Grand 
Rapids.  True,  man  does  not  live  by  business  alone,  and 
personal  considerations  frequently  supply  valid  reasons 
for  preferring  one  location  to  another.  Even  here,  how- 
ever, the  manager  who  recognizes  the  personal  element, 
when  it  enters  into  his  handling  of  a  question,  is  in  a 
fair  way  to  eliminate  it  or  take  precautions  to  compen- 
sate its  effects.  If  he  yields  to  interests  entirely  foreign 
to  his  business,  at  least  he  can  measure  the  cost  of  his 
yielding  in  definite  terms. 

Breaking  up  his  problem  into  its  constituent  prob- 
lems —  the  second  step  in  the  approach  —  he  discovers 
that  in  the  placing  of  his  sales  "  plant  "  he  must  con- 
sider not  only  its  relation  to  the  activities  of  demand 
creation,  but  also  to  the  physical  supplying  of  the  con- 
suming market  and  to  the  activities  of  production  and 
administration.  There  are  innumerable  sub-problems 
arising  out  of  the  interplay  of  these  various  activities 
and  the  necessity  of  establishing  policies  for  their  coor- 
dination and  direction. 

Consider,  in  the  first  place,  the  influence  of  demand 
upon  the  product,  an  influence  which  is  felt  by  all  spe- 
cialties and  by  not  a  few  established  staples.  Styles  are 
an  essential  factor  in  the  furniture  business;  the  sales 
department  which  keeps  in  constant  touch  with  middle- 
men and  consumers  can  sense  the  changing  tendencies 
of  demand  and  transmit  this  information  to  the  produc- 
tion department.  Under  normal  conditions,  the  more 
frequent  and  intimate  this  contact,  the  smaller  will  be 
the  chance  of  mistaking  the  current  drift  and  of  manu- 

117 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

facturing  a  stock  which  does  not  coincide  with  the  pub- 
lic's desire  for  chairs  and  tables  and  dressers  in  one  or 
another  "  period  "  style.  From  this  viewpoint,  a  selling 
plant  at  Chicago  will  have  advantages  over  one  in  New 
York;  while  location  at  Grand  Rapids  will  further  lessen 
the  danger  of  launching  models  in  which  retailers  will  put 
none  of  the  faith  that  is  expressed  in  orders  and  which 
housewives,  therefore,  will  encounter  only  in  post-season 
clearance  sales.  For  Grand  Rapids  is  the  seat  of  the 
seasonal  furniture  expositions  which  virtually  establish 
the  styles  for  the  general  trade.  Would  it  not  be  pos- 
sible, then,  to  place  the  permanent  selling  plant  at  the 
factory  and  display  samples  and  keep  representatives  at 
Grand  Rapids  during  the  semi-annual  exposition  periods 
in  January  and  July,  when  nearly  all  the  initial  buy- 
ing by  the  trade  is  done.f^  Few  dealers  come  to  market 
at  other  times,  except  to  conduct  hotel  men  or  other 
large  private  buyers  who  have  special  contracts  to 
place.  If  a  manufacturer's  line  and  prices  are  likely  to 
appeal  to  such  contract  buyers  it  might  be  profitable 
to  keep  a  permanent  display  room  at  Grand  Rapids. 

From  the  viewpoint  of  administration,  which  must 
also  be  considered,  if  the  balance  of  cost,  quality,  and 
service  is  to  be  maintained,  the  location  should  be  tested 
on  the  basis  of  expense,  and  of  effect  on  organization.  A 
location  at  the  plant  would  probably  mean  less  outlay 
than  one  at  Grand  Rapids,  Chicago,  or  New  York;  it  is 
the  part  of  the  manager  to  determine  whether  the  saving 
more  than  compensates  for  the  possible  selling  advan- 
tages sacrificed. 

Or  considering  the  problem  of  organization,  would  it 
be  more  effective  to  have  the  salesmen  focus  at  the  fac- 
tory, at  the  principal  market,  or  at  one  of  the  two  chief 

118 


LOCATION,CONSTRUCTION,  AND  EQUIPIVIENT 

cities?  If  the  selling  force  were  handled  by  districts  or 
if  the  sales  department  were  at  Grand  Rapids,  Chicago, 
or  New  York,  could  not  semi-annual  conventions  be 
held  at  the  factory  to  familiarize  the  salesmen  with  all 
the  new  numbers  in  the  line,  changes  in  style,  mate- 
rials, construction  and  finish,  and  similar  new  selling 
arguments,  thus  also  at  the  same  time  giving  the  de- 
signers and  foremen  at  the  factory  the  benefit  of  the 
salesmen's  knowledge  of  what  dealers  and  ultimate  users 
seem  to  favor  or  dislike?  Information  of  this  sort  can 
be  gathered  in  other  and  more  stable  lines  through  sales- 
men's daily  reports  and  inspection  trips  by  the  sales- 
manager  or  by  special  investigators.  Many  successful 
manufacturers  of  specialties,  like  adding  machines,  cash 
registers,  and  typewriters,  supplement  all  their  other 
means  of  gathering  information  with  factory  conven- 
tions of  the  sales  force  at  which  certain  sessions  are  de- 
voted entirely  to  discussion  of  existing  weaknesses  and 
possible  betterments  in  the  machines  and  of  the  future 
service  needs  of  users. 

The  effect  of  location  on  the  sales  department  and 
its  allied  departments  cannot  safely  be  ignored.  The 
practical  business  man  frequently  must  adapt  his  poli- 
cies and  methods  to  the  temperaments  and  personal 
needs  of  his  valuable  men.  With  the  factory  near 
Grand  Rapids,  the  center  of  the  furniture  district,  men 
work  and  live  in  a  furniture  environment.  Furniture 
is  the  absorbing  interest,  not  merely  of  one  community 
but  of  several;  competition  is  intense,  and  the  result  is 
a  stimulation  of  ideas  and  a  constant  interplay  of  opin- 
ion which  is  clearly  lacking  in  great  general  markets  like 
Chicago  and  New  York.  Such  an  atmosphere  naturally 
makes  for  enthusiasm  and  efficiency;   the  personnel  of 

119 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

the  sales  office  feels  it  all  the  time;  the  members  of  the 
field  force  feel  it  at  each  visit. 

On  the  other  hand,  Chicago  and  New  York  are  im- 
portant centers  of  the  trade.  The  competitive  element 
is  not  lacking.  The  standards  set  by  the  exclusive  shops 
and  great  retail  stores  which  buy  abroad  as  well  as  at 
home  are  high.  Advertising,  perhaps,  is  on  a  plane  of 
greater  efficiency.  The  interchange  of  information  and 
the  discussion  of  sales  problems  in  association  circles  is 
more  free  and  the  experience  of  one  line  is  more  acces- 
sible for  adaptation  by  another.  The  cities,  too,  are 
magnets  for  men  of  initiative  and  capacity;  able  sales- 
men, or  the  raw  materials  of  salesmen,  are  more  easily 
secured.  Here,  however,  the  angle  of  expense  must  not 
be  overlooked;  higher  salaries  must  be  paid  as  a  rule 
to  men  whose  homes  are  in  the  city. 

A  further  factor  to  be  considered  is  the  effect  of  the 
manufacturing  organization's  opinion  and  moral  sup- 
port on  the  temper  and  effort  of  both  sales  department 
and  selling  force.  With  the  sales  plant  at  the  factory  to 
maintain  this  contact  without  break,  to  represent  the 
field  men  there  and  in  turn  to  interpret  the  production 
departments  to  the  salesmen,  it  is  less  difficult  to  culti- 
vate a  company  spirit  and  solidarity  which  will  react 
on  every  man  enployed  and  bring  about  an  unusual 
degree  of  cooperation  and  mutual  interest.  With  cer- 
tain of  the  larger  industrial  organizations,  this  con- 
tact has  become  an  important  factor  in  both  sales  and 
production.  More  than  one  agent  has  been  carried 
across  the  last  barrier  separating  him  from  an  order  of 
consequence  by  the  knowledge  that  the  factory  flag 
will  be  raised  in  his  honor  and  that  a  thousand  company 
workmen  will  comment  appreciatively  on  his  exploit. 

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LOCATION,CONSTRUCTION,  AND  EQUIPMENT 

Workmen,  too,  feel  the  thrill  of  accomplishment  when 
new  production  records  for  the  day  or  week  or  month  are 
celebrated  in  a  special  letter  to  the  field  force.  Recently, 
for  instance,  the  executive  officers  and  selling  plant  of  a 
big  specialty  house  were  moved  from  a  mid-western 
town  to  New  York  to  accommodate  the  personal  desire 
of  the  president,  who  insisted  on  keeping  in  close  touch 
with  all  sales  activities.  A  significant  falling  off  in 
orders,  an  increase  in  points  of  friction  between  the 
making  and  sales  departments,  and  an  obvious  slump 
in  the  organization  spirit  during  the  ensuing  year  con- 
vinced him  that  he  had  made  a  mistake  in  policy;  and 
the  general  offices  and  selling  plant  were  hurried  back 
to  their  old  quarters  across  the  court  from  the  as- 
sembling departments. 

Another  vital  sub-problem  in  location  harks  back  to 
the  relations  between  the  sales  and  production  depart- 
ments. If  the  selling  policies  are  fixed  at  a  distance 
from  the  factory,  there  is  the  increased  possibility  of 
tangential  development  on  the  part  of  both,  which  we 
saw  as  a  danger  in  earlier  chapters.  Separated,  there  is 
a  strong  chance  that  the  two  forces  will  drift  apart. 
The  factory  is  likely  to  plan  a  product  which  will 
occasion  the  least  trouble  or  expense  in  process.  Pro- 
duction considerations  may  govern,  such  as  the  length 
and  width  of  lumber  in  stock  or  offered  by  supply 
houses,  the  gauge  or  quality  of  steel  which  is  easiest  or 
cheapest  to  buy,  the  finish  most  readily  applied,  and  so 
on,  without  particular  regard  for  demand  as  expressed 
by  the  sales  department. 

The  factory's  emphasis  is  nearly  always  on  cost;  the 
sales  department  is  concerned  with  service  and  the  im- 
pression, first  and  last,  which  the  product  makes  on  the 

121 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

customer.  The  requirements  of  the  market,  as  regis- 
tered by  the  sales  department  (within  the  limits  set  by 
the  principle  of  balance,  of  course)  should  be  satisfied  by 
the  factory.  Otherwise  the  burden  on  the  selling  force 
is  too  heavy  and  the  cost  of  closing  orders  likely  to  be 
out  of  all  proportion.  On  the  other  hand,  the  sales  de- 
partment must  not  misrepresent  the  product;  it  must 
sell  what  the  factory  is  able  to  deliver. 

With  the  sales  plant  at  the  works,  this  danger  of  tan- 
gential development  is  minimized;  only  blind  obsti- 
nacy could  prevent  the  sales  and  production  managers 
from  getting  together  and  reconciling  any  differences. 
Where  the  factory  is  near  the  principal  market,  the  situ- 
ation is  still  more  advantageous,  since  the  plant  for  de- 
mand creation  can  at  the  same  time  keep  its  contact 
with  the  trade  and  with  production.  Where  the  factory 
must  of  necessity  be  located  at  a  considerable  distance 
from  the  market,  as  are  the  cotton  mills  of  the  South, 
for  instance,  the  coordinating  function  of  the  general 
manager  is  called  into  play  to  compensate  for  the  ob- 
vious difficulty  in  maintaining  contact.  As  a  matter  of 
fact,  the  character  of  cotton  cloth  produced  in  the  South 
simplifies  the  question  of  demand  creation.  Moreover, 
proximity  to  raw  materials,  and  equable  climate,  and  in 
some  cases  lower  wages,  when  translated  into  smaller 
manufacturing  costs,  give  a  price  margin  which  equal- 
izes the  marketing  disadvantages. 

Other  constituent  problems  enter  into  this  general 
problem  of  where  to  place  the  plant  for  demand  cre- 
ation :  the  sales  prestige  of  a  big  city  location,  its  supe- 
rior facilities  for  the  preparation  of  advertising  both 
general  and  direct,  its  transportation  advantages,  and 
the  like.   There  are  also  local  sub-problems  which  must 

122 


LOCATION,CONSTRUCTION,  AND  EQUIPIVIENT 

be  settled:  whether  or  not  it  is  better,  for  example,  to 
maintain  the  sales  department  in  the  high-rent  central 
district,  on  a  fashionable  avenue,  or  on  the  Millinery 
or  Motor  or  Machinery  "  Row  "  where  your  trade  natu- 
rally congregates ;  whether  the  saving  in  rent  due  to  the 
separation  of  your  production  and  demand-creation 
plants  will  cancel  the  loss  in  efficiency  and  mutual  in- 
spiration; whether  ease  of  access  for  the  customer  is  an 
essential  in  sales  departments  (as  in  the  case  of  millinery 
houses,  which  seem  to  consider  a  central  location  abso- 
lutely necessary),  and  so  on  through  a  series  of  detail 
problems  which  will  vary  with  the  nature  of  the  business 
and  with  the  physical  factors  of  distance,  transportation, 
and  quarters  available. 

It  is  interesting  to  note  contradictory  tendencies  in 
different  businesses.^  There  is,  for  instance,  the  typical 
concentration  of  manufacturers  of  women's  garments 
on  Fifth  Avenue,  New  York,  with  the  obvious  end  of 
capitalizing  the  selling  prestige  such  a  location  gives. 
But,  contrariwise,  a  great  mail-order  merchandise  house 
removed  the  sales  department,  general  offices,  and  stock 
rooms  (the  latter  used  to  impress  visitors  and  forming, 
therefore,  part  of  the  plant  for  demand  creation)  from  a 
"  show  "  building  in  the  heart  of  a  western  city  to  a 
dingy  neighborhood  much  less  accessible  to  the  out-of- 
town  customers  whose  visits  were  desired.  Here  ad- 
ministrative considerations  commanded  the  change. 
The  company's  building  was  being  outgrown,  trucking 
costs  were  high,  a  prompt  service  of  shipments  was  diffi- 
cult to  maintain,  and  the  fixed  investment,  as  measured 
by  the  constantly  increasing  market  value  of  the  ground 

^  See  the  discussion  in  F.  W.  Taussig,  "  Principles  of  Economics,"  Vol, 
II,  pages  78-80. 

128 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

and  building,  was  out  of  balance  with  the  business  done. 
New  warehouses,  with  direct  railroad  connections,  were 
indispensable;  the  entire  establishment,  therefore,  was 
transferred  to  the  river  front,  where  rail  and  water  trans- 
portation met,  and  the  sales  value  of  the  central  loca- 
tion was  sacrificed  to  the  more  vital  considerations  of 
cost  and  service.  Analysis  of  these  sub-problems  is 
necessary,  of  course,  in  the  placing  of  an  actual  selling 
plant.  The  purpose  of  this  chapter,  however,  is  merely 
to  illustrate  how  a  systematic  approach  can  be  applied 
to  a  business  problem  rather  than  to  pursue  a  typical 
case  through  all  its  phases  and  conceivable  variations. 

Completing  this  analysis  (in  an  actual  case) ,  the  next 
process  is  to  assemble  all  the  relevant  factors,  listing 
them  if  their  number  or  complex  character  renders  them 
difl5cult  to  keep  track  of  and  giving  each  its  approxi- 
mate value  in  a  scale  of  comparison.  Many  of  these 
were  touched  upon  in  the  discussion  of  factory  location 
in  the  previous  section,  since  the  interdependence  of  the 
activities  of  production  and  distribution  is  so  close  as  to 
make  it  almost  impossible  and,  in  fact,  inadvisable  to 
fix  a  guiding  policy  in  either  field  without  first  weighing 
its  probable  effects  in  the  other. 

There  follows,  then,  the  final  step,  the  adoption  of  a 
fresh  point  of  view.  That  the  majority  of  furniture  sales 
departments  are  at  the  factory,  for  instance,  is  not  con- 
clusive evidence  that  this  is  the  best  policy.  It  may  be 
due  to  a  tradition  which  has  persisted  without  adequate 
reason.  A  man  with  sufficient  courage  and  initiative 
to  challenge  the  tradition  and  marshal  the  factors  for 
and  against  such  a  location  may  find  that  this  trade 
usage  perpetuates  the  best  balance  between  cost  and 
efficiency  in  the  creation  of  demand;   or  under  certain 

124 


LOCATION,CONSTRUCTION,  AND  EQUIPMENT 

circumstances  and  in  certain  lines  he  may  discover  that 
the  advantage  lies  with  separation. 

If  it  were  the  purpose  of  this  book  to  indicate  general 
policies,  broadly  applicable,  I  might  be  tempted  to  write 
that  the  weight  of  opinion  and  experience  favors  the 
location  of  the  selling  plant  at  the  factory.  For  special- 
ties, at  least,  this  would  seem  true,  since  a  specialty  is 
the  result  of  closer  adaptation  of  a  product  to  the  needs 
or  the  unformulated  desires  of  the  consumer,  and  the 
more  constant  and  intimate  the  relations  between  the 
department  which  arouses  or  interprets  the  market's 
demands  and  that  which  manufactures  the  commodities 
to  satisfy  them,  the  more  complete  should  be  the  co- 
ordination of  their  efforts  and  the  more  successful  the 
final  outcome. 

Compared  with  the  problem  of  the  location  of  the 
plant  for  demand  creation,  the  problem  of  construc- 
tion, the  housing  of  the  plant,  is  much  less  complex, 
though  still  made  up  of  several  constituent  problems. 
When  it  comes  to  expressing  his  business  in  terms 
of  architecture,  the  feeling  of  the  average  successful 
man  is  all  for  achieving  as  much  of  dignity,  beauty, 
and  originality  as  utility  and  his  financial  resources  will 
permit.  So  strong  is  this  feeling  that  it  amounts  to  a 
personal  bias  which  frequently  has  handicapped  the 
growth  of  the  business  by  diverting  money  needed  for 
more  essential  uses  and  given  rise  as  often  to  the  cyn- 
ical prediction  that  the  builder  was  erecting  a  monu- 
ment for  his  undertaking.  Approaching  the  question, 
then,  the  prudent  manager  will  recognize  this  very 
human  tendency  and  will  try  to  eliminate  the  personal 
factor,  or  at  least  to  bring  it  into  balance  with  factors 
more  vital  to  the  main  purpose,  which  is  the  erection  of 

125 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

the  most  effective  building  for  housing  the  plant  for  de- 
mand creation. 

Analyzing  his  main  problem,  the  manager  finds  him- 
self, as  in  his  approach  to  the  construction  of  his  fac- 
tory, confronted  first  v/ith  the  necessity  of  determining 
the  size,  type,  character  of  construction,  and  cost  of  the 
building  to  be  erected.  These  general  considerations 
are  for  his  decision ;  the  technical  building  problems  he 
must  necessarily  leave  to  an  architect  or  engineer. 
If  the  selling  plant  is  to  be  located  at  the  works,  in  style 
and  materials  the  building  will  match,  or  at  least  har- 
monize with  the  general  group.  It  may  even  occupy 
part  of  one  of  the  factory  buildings,  finished  and  fitted 
up  in  a  manner  commensurate  with  the  impression  it  is 
desired  to  make  on  customers  and  prospective  customers 
visiting  the  works. 

Broadly  speaking,  all  these  matters  of  size,  type,  char- 
acter, and  cost  are  governed  by  considerations  similar 
to  those  outlined  in  the  study  of  factory  construction; 
just  as  the  important  administrative  problem  involved, 
the  financing  of  the  selling  plant,  is  also  parallel.  In  the 
construction  of  the  factory,  the  accommodation  of  the 
equipment  was  the  first  purpose,  and  efficiency  of 
operation  the  main  end.  In  the  housing  of  the  plant  for 
demand  creation,  the  same  guiding  motives  appear. 
The  factor  of  advertising  value,  however,  takes  on 
much  greater  importance. 

The  manager,  in  shaping  his  construction  policies, 
must  consider  the  effect  on  customers,  especially  if  his 
industry  happens  to  be  in  a  line  like  furniture,  silver- 
ware, or  motor  cars,  and  customer  visits  to  the  factory 
are  encouraged.  Even  where  advertising  or  the  work 
of  traveling  salesmen  is  the  chief  factor  in  demand 

126 


LOCATION,CONSTRUCTION,  AND  EQUIPMENT 

creation,  the  prestige  obtained  from  imposing  or  un- 
usual buildings  is  often  important.  Indeed,  entire 
groups  of  buildings  occupied  by  houses  like  Butler 
Brothers,  Sears,  Roebuck  and  Companj',  the  Strath- 
more  Paper  Company,  the  National  Cash  Register 
Company,  and  the  leading  automobile  manufacturers 
are  brought  into  the  scheme  of  demand  creation  and  are 
exploited  in  direct  and  general  advertising  to  emphasize 
the  importance  and  the  volume  of  business  transacted 
and  to  enhance  the  reputation  of  the  product  or  the 
merchandise  distributed. 

In  assembling  and  striking  a  balance  among  all  the 
factors  that  enter  into  the  solution  of  these  sub-prob- 
lems, an  unbiased  and  individual  point  of  view  makes 
for  safety.  What  other  men  or  other  industries  have 
done  is  not  always  a  safe  guide.  It  may  be  necessary 
to  break  absolutely  new  ground  to  arrive  at  the  most 
effective  solution.  Undue  weight  given  to  traditional 
standards  or  trade  usages  is  likely  to  prove  as  unfortu- 
nate at  this  stage  as  would  failure  to  recognize  and  make 
allowances  for  the  personal  factor  in  the  beginning. 

Sometimes,  indeed,  the  history  of  a  single  organiza- 
tion supplies  examples  of  absolutely  opposed  policies. 
Fifteen  years  ago  a  large  industrial  concern  provided 
quarters  for  its  sales  department  at  the  factory  by 
rearranging  and  refinishing  one  of  its  earlier  mill-con- 
struction buildings,  choosing  to  add  a  new  steel-and- 
brick  unit  for  manufacturing  purposes  rather  than  build 
a  special  demand-creation  plant.  For  ten  years  the 
revamped  structure  served  every  purpose,  including 
that  of  impressing  thousands  of  prospective  custom- 
ers who  visited  the  works  and  tens  of  thousands  who 
viewed  the  factory  group  in  advertisements.     Then 

127 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

came  the  idea  of  completing  the  factory  group  and  pro- 
viding a  sort  of  monumental  entrance  to  the  works  by 
erecting  a  new  home  for  the  administrative  and  sales 
departments  at  another  point.  What  was  virtually  a 
high-grade  metropolitan  office  building  was  conceived 
and  executed  on  a  scale  so  lavish  as  to  provide  space 
for  generous  expansion  for  many  years. 

Officials  of  the  company  insist  that  the  new  structure 
has  been  a  wise  investment,  from  the  standpoint  of 
publicity  as  well  as  organization  efficiency  and  inspira- 
tion. This  is  probably  true.  It  is  entirely  possible  to 
reconcile  the  earlier  policy  of  investing  the  company's 
resources  in  factory  buildings  with  the  later  policy  of 
lavish  outlay  on  an  office  structure.  The  decisive  factor 
in  both  cases  may  have  been  administrative,  the  neces- 
sity of  utilizing  the  first  appropriation  where  it  would 
reduce  manufacturing  costs,  and  the  subsequent  growth 
of  a  surplus  which  could  be  devoted  to  a  selling  plant. 
As  the  advertising  of  this  concern  identffies  the  whole 
factor  with  its  sales  and  promotion  activities,  such  a 
building  would  adequately  express  the  strength  and 
dignity  of  the  business.  It  is  obvious,  however,  that 
the  business  man  seeking  facts  on  which  to  base  his 
own  construction  policies  must  exercise  care  and  judg- 
ment in  his  choice  of  examples  to  follow. 

Equipment  is  the  third  main  problem  in  this  manage- 
rial sequence  for  supplying  the  concrete  needs  of  the 
plan  for  demand  creation.  What  the  manager  must 
aim  at  is  to  furnish  the  sales  and  allied  departments  with 
tools  of  a  quality  and  effectiveness  proportionate  to  the 
results  sought.  His  own  experience  with  this  or  that 
kind  of  lighting  or  ventilation,  with  this  or  that  system 
of  filing  or  follow-up,  with  this  make  of  typewriter  or 

128 


LOCATION,CONSTRUCTION,  AND  EQUIPMENT 

that  model  of  desk,  may  be  of  great  value  in  determin- 
ing his  equipment  standards.  But  personal  preferences 
alone  should  not  inform  his  choice.  Quality  and  quan- 
tity of  output  are  the  two  chief  problems  into  which  the 
main  question  resolves  itself.  The  parallel  with  the 
results  of  our  analysis  of  factory  equipment  is  very 
close.  Even  competent  men  are  powerless  to  hold  out- 
put to  a  given  standard  unless  their  tools  are  of  corre- 
sponding capacities.  It  is  the  manager's  task  not 
merely  to  put  aside  groundless  prepossessions  and  preju- 
dices, but  to  analyze  and  master  the  elements  of  each 
sub-problem.  Knowing  these,  he  can  assemble  all  the 
factors  bearing  on  the  main  issue  and  match  and  rec- 
oncile them  without  regard  for  any  solution  which  has 
ever  been  offered  before. 

This  fresh  view^point,  indeed,  is  vital  in  considering 
equipment  for  the  reason  that  in  this  activity  of  busi- 
ness the  principle  of  balance  is  rarely  observed.  Too 
often  the  governing  factor  is  cost  rather  than  quality 
or  service.  The  average  manager  entertains  no  doubt 
of  the  value  of  factory  units  whose  production  he  can 
measure  in  terms  of  lowered  costs.  He  approves  the 
requisition  even  when  it  involves  the  exchange  or  scrap- 
ping of  costly  machines.  In  buying  equipment  for 
demand  creation,  however,  he  is  frequently  ultra- 
conservative. 

Salesmen  for  oflSce  appliances  say  that  while  the  pur- 
chase of  plant  equipment  is  left  more  or  less  to  subor- 
dinate executives,  the  buying  of  ojQBce  equipment  is 
usually  under  the  direct  control  of  the  management. 
The  reason  for  such  inconsistent  policies  is  not  hard  to 
find.  An  expenditure  for  machinery  devoted  to  demand 
creation  is  looked  upon  as  "  unproductive."   The  possi- 

129 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

bility  of  saving  time  and  money  or  of  increasing  output 
as  a  means  of  increasing  sales  is  not  realized  in  its  true 
proportion.  The  only  way  to  correct  this  shortsight- 
edness is  to  put  the  fresh  point  of  view  into  play.  The 
manager  must  coordinate  his  problem  of  finance  with 
that  of  equipping  for  effective  demand  creation. 

So  much  for  what  may  be  called  the  plant  policies  of 
demand  creation.  Lengthy  as  this  chapter  has  become, 
the  principal  factors  have  been  no  more  than  indicated. 
The  method  of  analysis  worked  out  in  our  earlier  ap- 
proach to  the  plant  policies  of  production  has  been 
applied  to  one  set  of  distribution  problems  —  in  this  in- 
stance concrete  problems  which  allowed  of  a  relatively 
simple  procedure.  But  in  the  following  chapters  we 
shall  consider  the  more  intricate  operating  policies  of 
demand  creation.  Here  again  the  method  of  approach 
and  analysis  worked  out  in  the  consideration  of  produc- 
tion activities  will  be  applied  to  the  policies  governing 
materials,  agencies,  and  organization,  the  operating 
problems  of  demand  creation. 


130 


CHAPTER  X 

MATERIALS 

WHEN  a  factory  starts  to  turn  out  goods,  its  static, 
preparatory  phase  ceases  and  its  dynamic  stage 
begins.  Up  to  that  moment  the  management  has 
been  preoccupied  with  policies  bearing  on  the  plant 
itself,  where  to  place  it,  how  and  of  what  to  build  it, 
how  to  equip  it,  though  all  these  policies  are  shaped 
and  colored  by  the  requirements  of  the  operating  activ- 
ities which  are  to  follow.  Once  the  plant  policies  are 
expressed  in  brick  and  mortar  and  machinery,  their 
broad  outlines  for  the  time  at  least  remain  fixed.  The 
guiding  policies  of  operation,  on  the  other  hand,  are 
subject  to  constant  change  to  accommodate  varying 
influences  affecting  materials,  labor,  and  in  lesser  de- 
gree organization. 

In  the  activities  of  demand  creation  a  close  parallel  to 
these  production  conditions  exists.  We  have  seen  that 
the  same  method  of  approach,  the  same  scheme  of  anal- 
ysis can  be  applied  to  both;  that  the  same  language  can 
be  carried  over  from  one  field  to  the  other.  In  each, 
plant  policies  have  to  do  with  location,  construction, 
and  equipment,  and  operating  policies  with  materials, 
agencies  for  applying  motion  to  materials,  and  organ- 
ization. In  both,  plant  policies  practically  crystallize 
after  they  are  established;  while  operating  activities 
present  fresh  problems  for  the  manager  every  day.  In 
demand  creation,  these  claims  on  his  attention  are  mul- 

131 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

tiplied  and  the  difficulty  of  analysis  and  decision  inten- 
sified because  of  the  general  lack  of  standards  and  be- 
cause the  factors  engaged  are  largely  abstract  quantities 
not  easily  measurable,  unstable  human  relations,  or  the 
unexplored  complexities  of  market  psychology. 

The  materials  of  demand  creation  are  ideas  which, 
when  put  into  circulation  by  certain  available  agencies, 
will  cause  consumers  to  want  the  goods.  Like  finished 
products  piled  up  in  a  factory  warehouse,  these  ideas 
are  of  no  value  until  they  are  transferred  to  prospective 
buyers.  This,  indeed,  is  the  whole  process  of  demand 
creation  —  the  transmission  of  ideas  about  a  commodity 
through  the  various  agencies  of  distribution,  middle- 
men, salesmen,  and  general  and  direct  advertising. 

Any  one  or  all  of  these  agencies  may  be  used.  Prob- 
lems of  organization,  are  involved  therefore,  including 
analysis  of  the  market,  determination  of  price  policies, 
the  most  effective  combination  of  agencies,  and  coordi- 
nation of  the  eflFort  and  money  expended  through  each. 
In  the  interests  of  simplicity,  however,  ideas  about  the 
goods  will  be  regarded,  for  the  time  being,  simply  as 
materials  for  possible  and  not  necessarily  for  specific 
and  actual  use.  For  the  same  reason,  in  the  chapters 
immediately  following,  the  agencies  of  demand  creation 
will  be  viewed  merely  as  agencies,  leaving  the  problems 
of  organization  and  coordination,  of  establishing  the 
right  relations  between  the  agencies  and  materials  em- 
ployed, for  later  discussion. 

To  consider  ideas  about  the  goods  as  the  materials  of 
demand  creation  is,  I  think,  a  new  conception.  If  it 
holds  in  practical  business,  it  should  simplify  all  the 
processes  of  our  analysis,  since  ideas  about  the  goods 
are  the  selling  points  from  which  salesmen,  middlemen, 

132 


MATERIALS 

and  advertising  men  develop  arguments  and  demon- 
strations to  arouse  in  the  consumer's  mind  interest  in  a 
product  and  a  desire  to  possess  and  enjoy  it. 

Despite  the  fact  that  demand  creation  is  largely  a 
problem  in  applied  psychology,  the  analogy  between 
factory  materials  and  selling  points  is  close.  Ideas  about 
the  goods  can  be  handled  as  definite,  almost  tangible 
things.  The  results  they  produce  can  be  measured  with 
a  fair  degree  of  accuracy,  particularly  in  advertising, 
where  the  personal  influence  of  the  salesman  does  not 
enter  tc)  confuse  the  issue.  This  means  that  the  effec- 
tiveness of  each  idea  can  be  tested,  that  different  ar- 
rangements of  the  same  ideas  can  be  compared  and 
measured  by  the  results  attained,  and  that  the  relative 
eflSciency  of  the  agencies  employed  for  their  transmis- 
sion can  be  accurately  determined. 

The  parallel  may  be  continued  still  further;  the  writ- 
ten or  printed  symbols  which  represent  a  given  idea  or 
series  of  ideas  can  be  classified,  indexed,  and  filed  as 
readily  and  as  definitely  as  the  different  materials  used 
in  manufacturing  are  classified,  inventoried,  and  put 
away  in  bins  until  they  are  needed. 

Here  enters  the  value  and  significance  of  the  concept 
that  ideas  about  the  goods  may  be  treated  as  the  ma- 
terials of  demand  creation.  Considered  as  materials, 
they  can  be  subjected  to  an  analysis  similar  to  that 
which  was  applied  to  the  problem  of  materials  in  pro- 
duction. There  we  found  that  the  governing  factors  had 
to  do  with  the  kind,  the  quality,  the  sources,  and  the  con- 
trol of  materials,  with  their  handling  and  utilization  in 
the  factory,  and  finally  with  the  determination  of  labo- 
ratory standards  to  guide  the  activities  involved  and  to 
insure  economy  and  efficiency.    Utilizing  the  same  ap- 

133 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

proach,  the  manager  finds  that  his  problem  of  demand 
creation  is  simplified,  that  it  becomes  to  a  great  degree 
one  of  definite  measm'ement  rather  than  of  opinion 
and  personal  judgment. 

Considered  in  this  way,  the  problem,  so  far  as  it  is 
concerned  with  the  materials  themselves  rather  than 
with  the  means  of  transmitting  them,  breaks  up,  as 
in  production,  into  two  groups  of  sub-problems  hav- 
ing to  do  (1)  with  the  kind,  quality,  sources,  control, 
and  utilization  of  the  ideas  in  the  sales  department 
(including  their  development,  accumulation,  arrange- 
ment, and  handling)  and  (2)  with  the  adoption  and 
development  of  laboratory  standards  in  the  treatment 
of  these  ideas.  This  last  is  by  no  means  the  least  im- 
portant step.  It  will  be  seen  that  something  analogous 
to  the  laboratory  methods  of  analysis,  employed  to 
determine  what  are  the  most  effective  and  economical 
factory  materials,  may  be  applied  with  corresponding 
advantage  to  the  less  obvious  field  of  market  dis- 
tribution. 

First,  then,  is  there  a  choice  as  to  the  kind  of  ma- 
terials to  be  employed  in  demand  creation,  the  kind 
of  ideas  .5^  Clearly,  j^es.  The  selling  points  of  soap  and 
sewing  machines,  of  rolled  oats  and  window  shades,  are 
certainly  not  interchangeable.  Besides  its  general  class 
character,  each  product  has  special  qualities  or  utilities 
which  should  form  the  basis  of  the  appeal  to  the  con- 
sumer and,  through  the  hope  of  quick  and  profitable 
sales,  to  the  middleman  as  well. 

It  is  quite  as  incumbent  on  the  manager  to  discover 
what  are  these  special  qualities  or  utilities  as  it  was  to 
canvass  the  possible  sources  of  factory  materials  and 
determine  whether  wood  or  clay  or  alloy  steel  should 

134 


MATERIALS 

enter  into  the  composition  of  the  product.  But  not  so 
easy.  In  choosing  his  manufacturing  materials,  he 
would  have  the  advice  and  experience  of  his  factory- 
superintendent,  perhaps  of  an  industrial  engineer  or 
chemist  as  well,  to  supplement  his  own  inquiries  and 
conclusions.  In  many  lines  where  the  raw  materials  of 
manufacture  will  be  the  finished  products  of  more  basic 
industries,  he  can  command  the  counsel  of  experts  em- 
ployed by  these  sources  to  analyze  his  needs  and  facil- 
itate their  supply.  Above  all,  he  has  the  recorded 
knowledge  and  practice  of  his  own  and  allied  trades  in 
the  solving  of  like  problems  and  in  the  handling  and 
processing  of  the  same  or  similar  raw  stock. 

It  is  here,  indeed,  that  the  manager  sees  his  two  prob- 
lems as  to  material  diverging  most  emphatically.  His 
sales  and  advertising  managers  will  give  him  help  com- 
parable to  that  of  his  superintendent  and  factory  spe- 
cialists; his  advertising  agency  and  the  service  bureaus 
of  various  mediums  of  publicity  will  supply  further 
counsel.  But  in  determining  and  measuring  the  value 
of  his  materials  of  demand  creation,  neither  he  nor  his 
aids  can  find  the  experience  of  other  manufacturers 
recorded  and  available  in  anything  like  the  same  de- 
gree as  in  production.  Standards  are  so  few  that  they 
may  almost  be  regarded  as  non-existent. 

Yet  the  kind  and  the  quality  of  the  materials  used 
in  demand  creation  are  matters  of  utmost  importance. 
Salesmen  frequently  have  it  forced  upon  them  that 
some  casual  argument,  some  apparently  minor  selling 
point,  seems  to  engage  the  attention  of  prospects  much 
more  readily  than  do  those  on  which  he  and  the  sales 
department  behind  him  have  placed  their  reliance..  In 
other  words,  their  conception  of  the  consumer's  wants 

135 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

and  the  motives  likely  to  lead  to  purchase  does  not 
coincide  with  the  facts.  Somewhere  the  analysis  has 
gone  astray,  and  the  most  available  materials  for  de- 
mand creation  have  not  been  appraised  at  their  true 
value  or  assigned  to  their  rightful  tasks. 

It  is  clear,  therefore,  that  a  test  of  quality  is  needed. 
But  is  such  a  test  practicable  in  dealing  with  quantities 
so  abstract  and  so  variable  as  human  motives  and  men- 
tal reactions  .f^  My  own  experience  and  knowledge  of 
what  other  business  men  have  accomplished  convince 
me  that  it  is  practicable.  The  best  ideas  are  those 
which  arouse  the  maximum  of  demand  at  a  given  ex- 
pense or  a  required  demand  at  a  minimum  of  outlay,  all 
things  considered.  Definite  methods  can  be  applied  to 
the  measurement  of  the  response  made  by  prospective 
purchasers  to  any  particular  selling  point  or  combina- 
tion of  selling  points,  especially  when  the  vehicle  of 
communication  is  direct  advertising  and  the  conditions 
under  which  the  tests  are  made  can  be  regulated  or  their 
influence  on  the  result  can  be  traced. 

At  this  point  the  considerations  having  to  do  with 
quality  merge  with  those  governing  the  establishment 
of  standards  in  materials.  The  latter  is  the  decisive 
problem,  indeed,  in  the  manager's  quest  of  the  most 
effective  selling  points.  The  standards  thus  developed 
jQot  only  are  criterions  by  which  to  guide  judgments, 
but  represent  actual,  proved  materials  for  demand  crea- 
tion —  individual  or  associated  ideas  about  the  goods, 
the  reactions  of  which  have  been  tested  and  demon- 
strated, ideas  which  can  be  used  over  and  over  again 
in  diverse  ways  by  the  different  agencies  employed. 

Before  approaching  this  problem  of  standards,  the 
gathering,  control,  and  utilization  of  the  materials  of 

136 


MATERIALS 

demand  creation  should  be  attended  to.  First  of  all, 
sources  of  ideas  about  the  goods  and  some  dependable 
method  of  bringing  them  together  must  be  developed. 
Reports  from  salesmen,  letters  from  customers,  the  re- 
sults of  prize  contests,  transcripts  of  sales  convention 
speeches  and  demonstrations,  and  direct,  intensive  anal- 
ysis of  the  product  by  the  sales  and  advertising  depart- 
ments are  the  commonest  sources  of  materials.  It  is 
feasible,  indeed,  to  work  out  as  definite  a  routine  for 
assembling  and  classifying  selling  points  and  making 
them  accessible  for  use  as  the  routine  which  the  purchas- 
ing agent  employs  in  keeping  his  factory  supplied  with 
the  steel  or  lumber  or  lubricating  oil  which  it  consumes. 

The  parallel  with  production  continues  in  the  utiliza- 
tion of  ideas.  When  a  manufacturer  determines  that 
one  particular  material  is  the  best  the  market  affords 
for  his  product  (cost,  quality,  and  service  to  the  con- 
sumer all  considered)  he  adopts  this  as  his  standard 
and  keeps  on  using  it  just  as  long  as  results  are  satisfac- 
tory and  a  better  material  is  not  discovered.  Yet  a 
striking  cause  of  waste  in  advertising  and  selling  lies 
in  the  fact  that  many  distributors  are  using  demand- 
creation  materials  of  secondary  value  because  they  con- 
ceive that  the  appeal  of  their  primary  ideas  has  worn  out. 

They  cast  about,  therefore,  for  new  ideas  about  their 
goods,  forgetting  that  consumers  buy  again  and  again 
to  satisfy  the  same  basic  needs,  and  that  long  after  you 
are  tired  of  your  reiterated  selling  points,  the  majority 
of  the  public  is  probably  still  unacquainted  with  them. 
Nearly  all  the  great  and  successful  modern  campaigns 
have  exploited  persistently  the  dominant  ideas  about 
their  products.  Just  as  the  hundreds  of  novels  published 
each  year  have  the  common  theme  of  love  but  achieve 

137 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

interest  and  distinction  by  reason  of  new  settings,  new 
situations,  and  new  characters,  so  the  most  effective 
advertisement  or  selling  talk  is  that  which  is  based  on 
the  primary  appeal  of  the  goods  to  the  consumer,  no 
matter  how  often  that  appeal  has  been  used  before. 
So  long  as  Ivory  soap  floats  and  is  99  j^  per  cent  pure, 
these  qualities  will  count  most  heavily  in  keeping  up 
its  volume  of  sales. 

When  analysis  of  your  product  has  uncovered  all  the 
elements  of  service,  advantage,  or  pleasure  which  it 
holds  for  the  consumer,  there  is  relatively  little  profit 
in  having  these  selling  points  in  stock  unless  each  is 
used  in  the  right  place,  at  the  right  time,  and  in  the 
right  way  to  produce  maximum  demand  with  the 
least  possible  expense  and  waste.  This  achievement 
frequently  involves  the  planning  of  a  series  of  inten- 
sive campaigns,  each  designed  not  only  to  employ 
effectively  some  one  of  the  agencies  of  demand  creation, 
but  also  to  make  the  most  of  the  available  ideas  about 
the  goods.  To  stimulate  curiosity' and  make  the  first  sale 
of  a  five-cent  cigar  or  a  ten-cent  cereal  is  obviously  an 
easier  undertaking  than  to  perform  the  same  function 
for  a  high-priced  motor  boat  or  player  piano.  Belief  in 
the  worth  of  such  a  product,  even  a  strong  desire  for 
that  product,  is  not  enough  to  make  a  man  purchase  it. 

The  average  consumer  will  risk  at  any  time  a  small 
amount  to  try  a  new  substitute  for  a  personal  or  house- 
hold necessity  he  is  buying  regularly.  The  lure  of  nov- 
elty or  a  single  outstanding  selling  point  may  suffice  to 
fix  his  attention  and  complete  the  sale.  When  he  faces 
a  considerable  outlay  for  some  article  lacking  vital  ap- 
peal, however,  or  when  to  buy  it  means  the  expenditure 
of  money  he  had  no  intention  of  spending  and  feels  no 

138 


MATERIALS 

necessity  of  spending,  it  may  require  a  protected  cam- 
paign through  magazine  and  newspaper  advertisements, 
through  letters,  catalogues,  house  organs,  and  salesman's 
calls  to  educate  him  to  the  point  of  purchasing.  Man- 
ufacturers of  cash  registers,  adding  machines,  type- 
writers, and  other  business  utilities  sometimes  pursue 
a  "  live  "  but  unresponsive  prospect  for  several  years 
before  the  order  is  finally  booked. 

It  follows  that  in  any  extended  campaign  of  demand 
creation  the  directing  minds  will  have  many  alternatives 
in  selecting,  combining,  and  arranging  the  selling  points 
suitable  for  use  by  each  agency  and  in  fixing  the  order 
in  which  the  various  combinations  shall  be  brought  to 
bear  upon  the  prospect.  Judgment  and  experience  will 
go  a  long  way  in  guiding  these  decisions,  in  marking  the 
superfluous  idea  whose  elimination  will  strengthen  the 
advertisement  or  sales  talk,  and  in  providing  a  logical 
program  for  the  presentation  of  the  various  arguments 
by  the  coordinate  agencies.  Yet  a  high  degree  of  ef- 
ficiency in  utilization'  will  not  be  attained  unless  the 
methods  as  well  as  the  materials  of  demand  creation 
(here  the  finished  letter,  advertisement,  or  sales  talk) 
are  tested  and  reduced  to  standards  —  a  not  impossible 
enterprize,  as  we  shall  see  a  few  pages  further  on. 

Making  the  materials  of  demand  creation  available 
for  use  may  be  considered  a  process  of  utilization  and 
control  closely  akin  to  the  handling  and  storing  of 
materials  in  the  factory.  The  ideas,  reduced  to  written 
or  printed  symbols,  must  be  classified  and  kept  ready 
for  easy  reference.  In  many  cases  the  memory  of  the 
salesman  or  advertising  manager  serves  both  as  inven- 
tory and  storage  place;  in  others,  scrap  books  or  filing 
devices  of  various  sorts  preserve  the  materials  and  make 

139 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

them  accessible  when  needed.  The  most  advanced  sales 
organizations  maintain  filing  and  index  systems  which 
group  similar  ideas  about  the  goods  in  the  order  of  their 
pulling  power  and  provide  means  of  automatically  bring- 
ing these  to  notice  at  intervals. 

One  sales  manager  of  my  acquaintance  files  every 
scrap  of  information  bearing  on  the  functions  and  known 
uses  of  his  machines  according  to  subject,  supplements 
this  material  with  such  clippings  from  magazines,  news- 
papers, and  letters  as  contain  suggestions  or  idea-germs, 
and  keeps  a  master  index  to  all  under  the  glass  top  of 
his  desk.  To  this  store  of  ideas  he  adds  from  his  corre- 
spondence, his  reading,  his  contact  with  men  inside  and 
outside  the  organization;  and  he  is  able  to  bring  the 
whole  to  bear  when  planning  an  elaborate  campaign  or 
dictating  a  single  sales  letter.  A  signally  successful  in- 
dustrial concern  improves  on  this  practice  by  display- 
ing all  its  live  sales  material  on  multi-leaved  fixtures 
which  permit  the  bringing  together  of  all  the  associ- 
ated ideas,  thus  making  the  members  of  each  group 
visible  at  the  same  time  and  facilitating  choice  of  the 
best  for  the  current  purpose.  Further,  this  company 
has  gathered  into  an  indexed  pocket  volume  several 
hundred  selling  points  for  its  various  products,  the  most 
effective  answers  to  prospects'  objections,  and  the  ap- 
proved methods  of  demonstrating  its  machines.  This 
is  used  for  the  refreshment  of  the  memories  of  seasoned 
salesmen  as  well  as  for  the  information  of  new  recruits. 

In  both  these  instances  the  attitude  toward  the  ma- 
terials of  demand  creation  is  practically  the  same  as  that 
of  the  average  factory  organization  toward  its  raw  and 
partly  processed  stock.  The  guiding  purposes  are  vir- 
tually identical:   to  insure  an  adequate  supply  of  ma- 

140 


MATERIALS 

terials,  to  classify  these  according  to  their  character, 
properties,  and  uses,  and  to  keep  them  instantly  acces- 
sible through  an  inventory  or  master-index. 

Quantity  is  a  further  factor  in  utilization.  In  manu- 
facturing the  chief  element  in  determining  quantity  is 
the  cost  of  the  materials  consumed.  The  solution  is  not 
reached  until  each  unit  of  product  contains  the  mini- 
mum amount  of  raw  stock  consistent  with  the  kind  of 
product  desired.  In  demand  creation,  on  the  contrary, 
quantity  is  a  question  of  economizing  the  prospective 
buyer's  time  and  attention.  Too  many  selling  points 
will  tire  him.  Too  few  will  certainly  fail  to  persuade 
him  that  he  must  purchase  or  else  sacrifice  a  possible 
advantage. 

Every  executive  has  had  contact  with  the  salesman 
who  "  talks  himself  out  of  an  order  "  as  well  as  with  the 
young  or  mediocre  man  who  does  not  know  how  to  pre- 
sent a  convincing  case  for  his  merchandise.  Both  are 
recognized  types  in  business;  both  are  victims  of  de- 
fective analysis.  In  the  first  case,  the  process  stops 
with  the  gathering  of  a  stock  of  ideas  about  the  goods 
and  fails  to  discover  the  proper  proportion  in  utilizing 
them.  In  the  second,  there  is  probably  no  conscious 
analysis  either  of  the  prospect's  needs  or  of  the  qualities 
in  the  merchandise  which  might  engage  his  attention. 

Analogous  types  of  advertising  are  also  common. 
There  is  the  letter,  magazine  page,  or  booklet  which 
crowds  so  many  arguments  upon  the  potential  buyer 
that  he  is  repelled  by  the  mass  or  is  fatigued  after  he 
begins  to  read;  and  at  the  other  extreme  is  the  adver- 
tisement which  puts  forward  so  few  or  such  general  ideas 
about  the  goods  that  no  positive  impression  is  made 
upon  the  prospect's  mind.    In  a  word,  the  problem  of 

141 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

quantity  is  largely  one  of  elimination  and  selection. 
The  necessity  of  establishing  the  right  balance  between 
the  materials  used  and  the  result  desired  is  no  less  im- 
perative than  in  manufacturing  operations. 

This  brings  us  to  the  final  problem  confronting  the 
business  man  in  his  consideration  of  the  materials  of 
demand  creation,  that  of  establishing  standards  com- 
parable with  the  laboratory  standards  so  common  in 
the  industries.  The  possibility  of  formulating  such 
standards  may  be  challenged  by  the  average  producer, 
no  matter  how  carefully  he  has  standardized  his  fac- 
tory materials.  For  here  as  elsewhere  in  the  field  of 
distribution  too  many  business  men  are  guided  by  rule 
of  thumb.  They  guess  at  the  most  effective  sales  ideas 
which  analysis  of  their  product  discloses,  guess  at  the 
most  forceful  forms  of  expressing  these,  and  guess  at 
the  most  efficient  agencies  and  mediums  for  transmit- 
ting them  to  prospective  purchasers.  They  spend  hun- 
dreds of  thousands  of  dollars  on  selling  campaigns  based 
on  a  series  of  approximations  or  opinions  arrived  at  in 
this  hit-or-miss  fashion. 

This  means  an  enormous  waste  of  money,  effort,  and 
product,  due  simply  to  the  general  lack  of  standardiza- 
tion. Nor  is  waste  from  this  cause  confined  to  the  ma- 
terials of  demand  creation.  It  is  characteristic  of  our 
distributive  organization  as  a  whole.  In  the  aggregate, 
it  constitutes  an  overwhelming  case  for  a  thorough  and 
systematic  study  by  government  and  cooperating  pri- 
vate agencies  of  all  the  activities  of  market  distribution. 

The  abler  business  man,  to  be  sure,  makes  an  effort 
to  determine  those  properties  of  his  goods  which  should 
attract  the  attention  of  the  possible  buyer  and  awaken 
the  desire  for  possession  Vvhich  is  the  root  of  market 

142 


MATERIALS 

demand.  He  discovers  by  a  general  inquiry,  if  not  by 
intensive  study,  the  points  of  superior  quality,  utility, 
or  service  inherent  in  his  products  as  distinguished 
from  competing  goods.  He  turns  for  guidance  as  to  the 
form  in  which  these  ideas  are  to  be  conveyed  to  his 
own  experience,  to  the  principles  of  English  style,  and 
to  the  practice  so  far  as  he  can  ascertain  it  of  other 
men  who  are  marketing  commodities  appealing  to  the 
same  classes  of  prospects,  under  conditions  similar  to 
his  own. 

From  the  observations  of  successful  sales  and  adver- 
tising managers,  psychologists,  and  students  of  busi- 
ness he  gathers  the  fundamental  rule  that  the  mental 
energy  of  the  prospective  buyer  must  be  conserved  by 
cutting  down  to  a  minimum  the  labor  attendant  on  the 
assimilation  of  new  ideas  and  concepts.  He  learns  to 
avoid  abstract  statements  and  vague  general  claims. 
He  seeks  short,  familiar  words  which  will  convey  in 
homely  phrase  the  exact  meaning  he  wishes  to  transmit. 
He  employs  apt  illustrations  and  figurative  statements 
whenever  they  will  help  the  prospect  to  visualize  the 
product  and  its  effect  on  the  comfort,  the  pleasure,  the 
health,  or  the  safety  of  himself  or  those  he  holds  dear. 
And  he  uses  the  imperative  mood  judiciously  when  the 
reaction  desired  is  at  length  suggested. 

These  are  only  a  few  of  the  many  precepts  put  for- 
ward tentatively  or  more  decisively  by  the  psychologist 
and  by  the  specialist  in  sales.  Their  weakness  lies  in 
their  a  priori  basis.  What  the  business  man  requires 
is  a  practical  test  for  certain  ideas  about  his  goods  under 
conditions  approximating  those  of  the  physical  or  chem- 
ical laboratory.  He  wants  a  workable  method  of  trying 
out  selling  points  alone  and  in  combination,  in  diverse 

143 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

forms,  and  with  varying  degrees  of  emphasis,  before 
staking  thousands  of  dollars  on  the  effect  they  will 
produce  in  an  actual  sales  campaign. 

In  making  these  tests,  the  manufacturer  can  borrow 
the  methods  by  which  statisticians  in  many  fields  of 
social  and  business  endeavor  arrive  at  their  results. 
These  latter  are  familiar  with  what  are  termed  mass 
phenomena  and  put  their  dependence  in  the  law  of  aver- 
ages. They  know  that  they  can  approximate  the  aver- 
age height  of  a  country's  population,  for  example,  by 
measuring  a  few  thousands  of  representative  folk  drawn 
from  the  larger  body.  If  the  smaller  group  is  really  typi- 
cal of  the  mass,  the  statistician  knows  that  its  average 
height  will  coincide  roughly  with  the  average  height  of 
the  total  population. 

The  business  man  can  apply  this  method  to  tests  of 
his  demand-creation  materials.  In  direct  advertising, 
the  mailing  of  sales  letters,  circulars,  catalogues,  sam- 
ples, and  the  like  to  prospective  buyers,  orders  for  the 
goods  are  proof  of  an  awakened  demand  which  is  ca- 
pable of  direct  statistical  measurement.  Each  piece  of 
advertising  posted  is  a  stimulus;  the  number  of  re- 
sponses per  thousand  of  communications  can  be  deter- 
mined as  exactly  as  though  the  operations  were  con- 
ducted in  a  physical  or  psychological  laboratory.  It  is 
a  simple  matter  of  so  framing  and  keying  the  advertise- 
ment that  every  response  can  be  identified  and  only 
those  due  to  it  shall  be  counted. 

It  is  possible  also  to  isolate  a  group  from  the  general 
mass  (just  as  the  sociologist  isolates  a  group  for  study 
of  its  stature)  to  test  the  average  reaction  induced  by 
any  unit  or  series  of  advertisements,  thus  forecasting 
the  results  that  will  be  attained  when  the  campaign  is 

144 


MATERIALS 

extended  to  the  mass.  If  the  test  is  unsatisfactory,  it 
demonstrates  either  that  the  selling  points  put  forward 
lack  persuasive  or  convincing  power,  or  that  the  form 
in  which  they  are  cast  is  defective.  A  third  alternative 
hinges  on  the  chance  that  the  group  of  individuals  se- 
lected for  the  test  is  not  representative  of  the  mass. 
The  trial  list,  however,  can  be  revised  again  and  again 
until  it  is  truly  typical,  until  the  average  of  responses 
per  thousand  of  letters  or  catalogues  mailed  does  not 
vary  greatly  between  test  and  full  campaign. 

Once  the  business  man  secures  a  representative  test 
list  or  series  of  lists,  he  can  try  out  at  relatively  small 
expense  all  his  materials  of  demand  creation  and  deter- 
mine which  selling  points  and  what  forms  of  each  are 
most  effective  in  stimulating  the  market  for  his  prod- 
ucts. This  method  of  "  sampling  "  has  been  successfully 
employed  so  often  that  its  value  and  accuracy  are 
beyond  question. 

Take  the  case  of  a  producer  of  a  food  specialty  plan- 
ning a  campaign  to  reach,  not  the  consumers,  but  the 
grocers  of  the  country.  The  whole  body  of  dealers  in 
this  line  falls  little  short  of  a  quarter  of  a  million.  After 
working  out  a  series  of  selling  points  expressed  in  such 
forms  as  he  thinks  likely  to  be  effective,  let  the  manu- 
facturer test  this  material  by  mailing  it  to  say  one 
thousand  grocers.  The  group  selected  must  be  large 
enough  to  give  typical  results  and  it  must  be  so  selected 
as  to  be  of  the  same  general  character  as  the  whole 
body  of  grocers. 

Assuming  these  conditions,  the  number  of  orders  or 
inquiries  received  from  the  thousand  grocers  can  be 
tabulated,  and  the  probable  response  per  thousand  can 
be  estimated  when  the  same  ideas  in  the  same  form  are 

145 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

conveyed  to  the  two  hundred  and  iEifty  thousand.  This 
can  be  followed  or  paralleled  by  another  direct  mailing, 
to  another  test  list  similarly  constituted,  of  an  alter- 
nate campaign  built  on  different  selling  arguments  or 
on  the  same  arguments  differently  expressed.  Half  a 
dozen  test  campaigns,  indeed,  might  be  profitably  con- 
ducted at  the  same  time.  The  greater  the  number  of 
tests  (always  assuming  that  the  trial  lists  are  representa- 
tive and  of  about  the  same  character)  the  more  certainly 
the  results  will  define  the  weightiest  selling  points  and 
the  happiest  ways  of  conveying  them  to  the  prospect. 

Intensive  study  of  the  reactions  produced  by  individ- 
ual units  in  each  test  may  even  result  in  a  composite 
final  campaign  which  will  far  exceed  the  returns  from 
the  best  of  the  trial  campaigns.  It  is  thus  possible  to 
determine  what  ideas  about  the  goods  and  what  ar- 
rangement and  phrasing  of  those  ideas  are  most  effective 
in  arousing  demand  —  in  other  words,  to  select  your  ma- 
terials of  demand  creation  with  little  more  dependence 
on  guesswork  than  obtains  in  the  choice  of  raw  mate- 
rials in  a  standardized  factory. 

That  such  tests  are  practical  is  indicated  by  the  typ- 
ical records  presented  in  the  table  on  the  opposite  page. 
Here  are  shown  the  results  of  several  "  try-outs  "  and 
complete  mailings  of  various  letters  and  circulars  mak- 
ing the  same  specific  offer  of  certain  commodities.  The 
tests  and  mailings  covered  five  well-defined  functional 
groups  of  business  men  and  two  additional  groups  of 
members  of  large  local  merchants'  associations.  In  all 
but  two  instances,  B^  and  D,  it  will  be  noted,  the  results 
of  the  tests  and  full  mailings  were  practically  parallel. 
In  one  of  these,  B^  mailed  to  master  printers  in  June, 
1915,  the  orders  fell  far  short  of  what  the  test  forecast; 

146 


IVIATERIALS 

yet  the  same  letter  and  inclosure  to  mailed  credit  men 
in  May,  1915  (B^),  brought  orders  corresponding  very 
closely  with  the  results  of  the  test  mailing  and  also 

TESTS  AND  MAILINGS  TO  RATED  BUSINESS  MEN 

Minimum  Standard,  16  Orders  per  1,000 

Test  lists,  each  500  names 

Note:  In  the  column  headed  "Material  Mailed,"  it  will  be  seen  that  the  same  letters 
stand  for  identical  material,  the  exponent  numbers  designating  the  different  mailings.  The 
unit  of  sale  was  $5.00. 


Tests 

Mailings 

Ma- 
terial 
Mailed 

Classes 
Addressed 

Date 

Orders 

Re- 
ceived 

Orders 
per  1000 

Number 
MaUed 

Orders 

Re- 
ceived 

Orders 
per  1000 

Ai 

Printers 

4/19/15 

9 

18 

5,368 

117 

21.8 

A2 

Credit  Men 

9/14/14 

13 

26 

A3 

ti                u 

10/19/14 

13 

26 

16,376 

342 

20.9 

A* 

Advertisers 

10/22/14 

9 

18 

13,890 

295 

21.2 

A* 

Architects 

4/29/15 

7 

14 

1,478 

21 

14.3 

A" 

Association 

No.  1 

4/29/15 

16 

32 

2,770 

75 

27.1 

A^ 

Association 

No.  2 

Not 

Tested 

2,972 

100 

33.9 

Bi 

Printers 

6/  1/15 

14 

28 

5,296 

93 

16.2 

B2 

Credit  Men 

4/15/15 

9 

18 

15,412 

271 

17.6 

B3 

Advertisers 

Not 

Tested 

13,848 

197 

14.3 

B* 

Manufacturers 

6/1/15 

7 

14 

8,492 

148 

17.3 

C 

Credit  Men 

8/20/14 

2 

8 

D 

(1                  u 

9/14/14 

15 

30 

16,439 

348 

21.1 

El 

u             a 

1/25/15 

4 

8 

E2 

Advertisers 

1/25/15 

4 

8 

pi 

Credit  Men 

3/25/15 

6 

12 

F 

Advertisers 

3/25/15 

2 

4 

Qi 

Credit  Men 

7/22/15 

4 

8 

G2 

Advertisers 

9/20/15 

7 

14 

with  the  final  results  of  B^  Mailed  also  to  a  selected 
list  of  manufacturers  in  June  (B^),  the  materials  again 
brought  the  standard  result.    In  this  last  case  the  test 

147 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

fell  under  the  minimum,  but  because  of  the  uniform 
performance  of  B^  and  B^,  a  chance  was  taken  and  the 
letter  sent  out.  In  B^  mailed  the  same  day  to  adver- 
tisers, without  a  special  list  test,  the  returns  fell  under 
the  minimum  standard  allowed. 

Study  of  this  and  hundreds  of  similar  tests  would 
seem  to  indicate  that  lists  classified  along  functional 
lines  require  individual  tests  even  for  materials  gener- 
ally effective.  In  A^  for  instance,  the  test  result  of 
fourteen  orders  per  thousand  was  disregarded  because 
the  list  was  small  and  the  letter  and  circular  used  had 
been  uniformly  successful  on  several  other  lists.  Yet 
here  the  final  result  was  almost  identical  with  that  of 
the  trial  and  netted  only  fifty-seven  per  cent  of  the 
average  from  other  lists. 

As  final  evidence  of  the  value  of  classifying  lists  ac- 
cording to  functions  or  dominant  interests,  observe 
that  A^  and  A^  the  same  material  sent  to  the  members 
of  two  large  associations  of  business  men,  after  a  single 
test,  brought  very  satisfactory  results  from  both  lists. 
Another  important  fact  to  note  is  that  when  the  mini- 
mum standard  of  orders  is  as  low  as  sixteen  and  the 
test  group  numbers  only  five  hundred,  there  is  danger 
that  the  average  will  be  disturbed  where  one  individual 
influences  the  giving  of  several  orders.  The  larger  the 
trial  group  and  the  more  clearly  classified  the  various 
lists  used,  the  more  exact  an  index  will  the  test  give  on 
the  results  from  the  complete  mailing.  Experience 
with  the  varying  factors  involved  teaches  one  to  sense 
the  abnormal,  whether  in  composition  of  mailing  list  or 
ratio  of  responses. 

This  method  of  studying  ideas  and  forms  of  expres- 
sion in  direct  advertising  would  be  important  even 

148 


MATERIALS 

though  its  use  did  not  extend  to  other  agencies,  since  it 
permits  the  business  man  to  guide  an  extensive  adver- 
tising campaign  by  means  of  an  investigation  relatively 
inexpensive.  But  the  importance  of  the  laboratory 
method  does  not  end  with  direct  advertising.  The  root 
idea  is  the  same  whatever  the  agency  for  selling  em- 
ployed. Selling  is  accomplished  by  communicating  ideas 
about  the  goods  through  middlemen,  salesmen,  gen- 
eral advertising,  or  direct  advertising.  The  ideas  remain 
virtually  the  same  in  all  instances.  The  business  man, 
therefore,  can  determine  in  his  direct  selling  laboratory 
what  ideas  and  what  combinations  of  ideas  constitute 
the  most  effective  selling  material.  He  can  then  carry 
over  the  results  obtained  to  his  selling  by  other  agencies. 

To  illustrate:  An  extensive  promotion  campaign  is 
under  consideration.  The  producer  contemplates  spend- 
ing thousands  of  dollars  upon  advertising  in  certain 
periodicals.  What  can  the  "  distribution  laboratory  " 
do  to  determine  the  ideas  to  be  conveyed  and  the  forms 
of  expression  to  be  used  to  create  the  desired  demand? 
The  circulation  of  a  single  periodical  used  may  run 
into  the  hundreds  of  thousands  or  even  into  the  mil- 
lions. It  is  the  part  of  prudence,  therefore,  to  test  the 
response  that  will  result  from  the  communication  to  this 
enormous  body  of  subscribers  of  ideas  about  his  goods. 
Accordingly  he  works  out  the  most  effective  selling 
points,  the  most  effective  arrangement,  the  most  effec- 
tive form  of  expression  through  direct  trial  mailings.  He 
can  even  test  the  final  "  copy  "  itself,  just  as  it  will  ap- 
pear in  the  periodical,  by  mailing  it  direct  to  relatively 
small  groups  and  noting  the  reaction  which  it  produces. 

Moreover,  he  can  determine  in  this  way  the  response 
from  differing  economic  strata.   Ideas  adapted  to  build 

149 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

up  a  demand  for  a  commodity  on  one  economic  or  social 
plane  may  fail  utterly  with  another.  The  value  of  a 
"  try-out  "  for  each  lies  in  the  fact  that  most  periodicals 
circulate  within  well-defined  economic  and  social  limits. 
The  ideas  and  forms  of  expression  which  created  a  de- 
mand in  direct  advertising  addressed  to  these  strata  is 
likely  to  have  a  similar  effect  when  used  in  periodicals 
circulating  among  the  same  classes. 

The  application  of  laboratory  tests  to  the  selling  ar- 
guments used  by  salesmen  is  equally  practicable.  One 
need  only  appreciate  the  fundamental  identity  of  the 
selling  function,  whatever  the  agency  employed,  to  real- 
ize that  the  results  obtained  in  experiments  in  direct 
advertising  can  be  carried  over  into  distribution  by 
salesmen.  The  whole  structure  of  the  selling  talk  can 
be  built  up  on  the  ideas,  the  order  of  arrangement,  and 
the  forms  of  expression  demonstrated  as  most  eflScient 
in  creating  demand  through  the  medium  of  direct 
advertising. 

Many  progressive  organizations,  indeed,  insist  on  all 
salesmen  mastering  a  standard  approach  and  selling 
talk  which  marshals  certain  basic  arguments  in  a  settled 
order  and  phrases  them  in  a  definite  way.  This  is  im- 
pressed upon  the  new  salesman  as  more  likely  to  secure 
the  order  than  would  any  argument  he  could  frame  im- 
promptu. It  serves  chiefly  as  a  foundation  for  the  argu- 
ment he  makes  to  possible  buyers.  The  assumption 
of  the  laboratory  point  of  view  by  salesmen,  the  con- 
scious testing  of  ideas  and  methods  and  the  recording 
of  results,  may  in  turn  strengthen  the  entire  sales 
organization. 

The  general  principles  upon  which  the  testing  or  samp- 
ling of  ideas  depends  apply  also  when  the  possibilities 

150 


MATERIALS 

of  the  whole  market  are  studied  by  the  intensive  cultiva- 
tion of  one  section.  It  is  only  necessary  that  social  and 
economic  conditions  be  broadly  identical.  Other  things 
being  equal,  the  result  of  a  test  in  Kansas  should  hold 
true  for  the  states  immediately  north  and  south,  though 
it  would  not  apply  to  Georgia  or  Alabama.  On  this 
basis  a  localized  selling  campaign,  narrow  in  extent, 
will  give  relatively  exact  data  from  which  the  possibil- 
ities of  a  general  campaign  of  like  character  may  be 
forecast. 

Again,  the  laboratory  method  here  suggested  lends 
itself  to  a  determination  of  just  what  elements  of  qual- 
ity and  service  in  a  given  product  are  deemed  most  es- 
sential by  the  consumer.  The  effectiveness  of  the  ideas 
conveyed  in  building  up  a  demand  reflects  the  intensity 
of  human  wants  as  to  the  elements  of  quality  and  service 
described.  The  producer  can  sound  the  consumer  and 
can  adapt  his  product  to  the  latter's  expressed  demand. 
In  other  words,  the  entire  selling  campaign  can  be 
planned  and  directed  by  guarded  tests  comparable  to 
the  laboratory  investigations  of  the  scientist. 

It  may  be  possible  in  time  greatly  to  extend  and  sim- 
plify this  analysis  of  materials.  As  yet  the  professional 
psychologist  has  addressed  himself  to  few  of  the  prob- 
lems which  engage  the  attention  of  business  men.  The 
conclusions  arrived  at,  too,  are  rarely  of  much  practical 
value,  chiefly  because  the  psychologist,  in  framing  his 
tests  or  phrasing  his  questions,  is  not  always  cognizant 
of  the  thing  the  business  man  wants  to  know.  In 
some  of  these  experiments  a  series  of  advertisements  has 
been  submitted  to  a  group  of  thirty,  forty  or  fifty  stu- 
dents, themselves,  perhaps,  far  removed  in  character, 
tastes,  and  purchasing  power  from  the  average  con- 

151 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

sumer,  and  they  have  been  asked  to  indicate  which  is 
the  most  attractive  or  effective  of  the  lot. 

The  question  should  have  been  more  specific:  "  Which 
advertisement  would  get  your  attention  first?  Which 
one,  if  any,  would  hold  your  interest?  Which  one,  if 
any,  would  stir  curiosity  or  make  you  want  the  product 
enough  to  ask  for  it,  by  letter  or  at  the  nearest  store?  " 
And  so  on,  breaking  the  one  question  up  into  perhaps 
a  dozen  specific  inquiries  which  would  give  definite  in- 
formation as  to  the  size,  the  shape,  the  quantity  and 
character  of  ideas,  the  kind  of  illustration,  and  the  style 
of  argument  which  would  secure  and  hold  the  reader's 
attention  and  induce  the  desired  action,  whether  this 
be  the  filling  out  of  a  coupon  or  the  inclosure  of  a  signed 
order  and  check. 

Some  encouraging  attempts  have  been  made  to  elim- 
inate from  such  laboratory  experiments  the  factors 
which  reduce  the  value  of  the  results  and  to  check  up 
these  results  by  repeating  the  experiment  under  actual 
business  conditions.  One  of  the  most  interesting  of 
these  studies,  conducted  at  the  University  of  Michigan 
in  1913,  minimized  the  chances  of  error  by  submitting 
the  questions  to  five  hundred  and  sixty  persons,  fifty 
of  whom  were  outside  business  men.  The  questions, 
too,  dealt  with  specific  things,  like  the  attention  value 
of  various  sizes  of  copy,  from  full  pages  to  quarter  pages, 
and  the  efficiency  of  the  coupon  in  securing  answers. 
The  man  who  conducted  the  experiments  was  himself 
a  successful  advertiser,  and  the  copy  which  he  submitted 
to  his  subjects  was  tried  out  a  little  later  in  an  advertis- 
ing medium  of  known  pulling  power.  ^ 

It  is  significant  that  the  results  of  both  tests  cor- 

^  See  W.  A.  Shryer,  "  Analytical  Advertising." 
152 


MATERIALS 

responded  closely.  The  large  number  of  subjects  in 
the  test  undoubtedly  reduced  the  percentage  of  error. 
Divided  into  groups  of  about  twenty-five  persons,  it 
was  found  that  the  opinions  of  a  few  of  these  groups 
varied  widely  from  the  average,  thus  indicating  the 
danger  of  depending  for  a  decisive  test  on  a  single  small 
body  of  subjects.  At  the  same  time,  further  illustra- 
tion was  given  the  principle  that  specific  problems  in 
demand  creation  can  be  solved  by  laboratory  tests  con- 
ducted under  carefully  guarded  conditions  on  a  suffi- 
cient number  of  representative  subjects. 


153 


CHAPTER  XI 

AGENCIES  OF  DEMAND  CREATION  — THE 
MIDDLEMAN 

■p^EMAND  creation  is  a  problem  in  the  transmis- 
-■— '  sion  of  ideas.  Here  is  a  business  man  seeking 
a  market  for  his  product.  It  may  be  a  standard 
article  somewhat  improved,  but  at  the  usual  price.  It 
may  be  the  usual  grade  at  a  lower  price,  or  a  franldy 
cheaper  substitute  depending  on  a  marked  price  reduc- 
tion for  its  appeal.  Or  he  may  offer  a  specialized  com- 
modity invented  or  adapted  to  satisfy  a  specific  want 
not  yet  fully  realized  by  the  consumer.  The  seller,  as  a 
rule,  believes  that  in  one  or  more  of  the  three  essentials 
—  quality,  price,  or  service  —  the  product  offers  ad- 
vantages over  any  other  article  of  its  kind.  Else  he 
would  not  undertake  the  endless  labor  of  stimulating 
demand  for  an  inferior  commodity.  It  may  sometimes 
happen  that  an  article  not  otherwise  superior  reflects 
only  the  prestige  or  charm  of  the  seller,  or  more  ener- 
getic selling  power  overcomes  the  attraction  of  greater 
intrinsic  merit  in  competing  merchandise.  But  even 
here  faith  in  the  goods  is  generally  recognized  as  indis- 
pensable. "  First  sell  yourself  "  is  an  axiom  in  the 
practice  of  salesmanship. 

Now  "  selling  one's  self  "  is  the  rule-of -thumb  equiv- 
alent for  the  series  of  activities  described  in  the  last 
chapter  —  the  gathering,  classifying,  testing,  and  stand- 
ardizing of  the  materials  of  demand  creation.  With 
these  proved  ideas  about  the  goods  in  hand,  the  mana- 

154 


THE  MIDDLEIVIAN 

ger's  task  is  to  transmit  them  effectively  to  the  minds  of 
possible  consumers.  When  he  thus  leads  consumers  to 
adopt  his  viewpoint,  as  to  the  utility  and  desirability 
of  his  wares,  he  induces  them  to  become  purchasers. 
For  this  work  of  transmission,  he  finds  that  three  impor- 
tant agencies  have  been  developed,  the  middleman,  the 
exclusive  sales  force,  and  direct  and  general  advertising. 

His  problem  is  to  determine  which  one  of  the  three 
will  best  perform  the  function  of  demand  creation  with- 
out undue  interference  with  other  necessary  activities 
of  production  and  distribution.  He  may  discover  that 
two  or  more  can  be  combined  advantageously,  or  that 
different  agencies  will  be  most  effective  in  different  sec- 
tions of  his  selling  field.  Following  the  analogy  already 
indicated,  they  may  be  considered  as  corresponding  to 
the  labor  factors  in  production.  To  these  ideas  or  sell- 
ing points,  also,  motion  must  be  applied  through  human 
effort  in  order  to  perfect  and  transmit  them  to  the  minds 
of  prospective  users  and  thereby  create  desire  for  the 
goods. 

In  any  extended  study  of  the  agencies  of  demand  crea- 
tion it  becomes  evident  that  the  sales  record  of  a  single 
industry  frequently  includes  all  the  significant  func- 
tions and  operations  which  have  marked  the  develop- 
ment of  distribution  since  exchange  of  commodities 
began.  The  surplus  product  of  a  country  blacksmith 
shop  in  the  early  fifties  —  to  quote  a  classic  illustra- 
tion in  American  business  —  consisted  of  several  farm 
wagons  which  the  neighborhood  had  not  been  able  or 
willing  to  absorb.  A  local  demand  for  a  number  of  such 
vehicles  had  been  created  with  little  effort.  A  simple 
demonstration  which  convinced  the  prospective  buyer 
that  wheels,  axles,  and  other  members  were  of  sound 

155 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

timber  equal  to  the  rough  usage  before  them,  was  usu- 
ally sufficient  to  complete  the  transaction,  since  the 
product  satisfied  a  known  and  imperative  want  of  the 
customer.  When  all  the  farmers  in  the  district  who 
needed  and  could  afford  new  wagons  had  been  supplied, 
however,  the  makers  faced  the  alternative  of  finding  a 
market  further  afield  or  of  suspending  manufacturing 
operations  and  reverting  to  the  odd  jobs  with  which  the 
average  forge  of  the  time  occupied  itself. 

Had  they  been  ordinary  blacksmiths,  they  would  have 
taken  the  easier  way,  or  probably  would  have  failed  to 
realize  that  they  had  any  choice  in  the  matter.  But  they 
possessed  initiative,  intelligence,  and  that  pride  in  their 
product  which  has  been,  I  believe,  an  important  motive 
in  the  expansion  of  American  business.  One  of  the 
brothers,  therefore,  hitched  a  team  to  a  string  of  the 
surplus  wagons  and  drove  forth  in  quest  of  buyers.  He 
found  them  on  this  and  on  subsequent  excursions  within 
the  country  and  without,  in  villages  and  towns,  on  farms 
along  the  way,  at  crossroads  stores,  and  even  at  smithies 
whose  owners  had  not  the  craft  or  capacity  to  build 
wagons  in  numbers  to  supply  the  local  demand. 

Wherever  conditions  seemed  to  warrant  and  a  com- 
petent man  could  be  interested,  a  representative  was 
appointed,  at  first  to  take  orders  on  commission  for  the 
wagons  which  the  brothers  learned  to  trade-mark  and 
guarantee,  but  later  as  a  wholesale  or  retail  dealer  who 
bought  his  stock  and  assumed  all  the  functions  and  risks 
of  demand  creation  and  supply  in  his  territory.  From 
such  homely  beginnings  the  Studebaker  business  has 
grown  to  international  proportions,  manufacturing  a 
long  line  of  horse-drawn  and  motor  vehicles  and  distrib- 
uting them  to  every  civilized  corner  of  the  earth.    In 

156 


THE  MIDDLEMAN 

developing  this  world  market,  virtually  all  the  agencies 
of  demand  creation  have  been  employed :  middlemen  of 
various  sorts,  wholesalers,  retail  dealers,  and  exclusive 
agents;  a  direct  sales  force,  including  not  only  sales- 
men, but  branch  houses,  district  sales  organizations,  and 
even  retail  branches  in  the  larger  cities,  as  well  as 
direct  and  general  advertising  of  every  kind  and  class. 

Whether  the  ideas  about  the  goods  are  communicated 
through  spoken  or  written  symbols,  by  middlemen,  sales- 
men, or  advertising,  the  ultimate  purpose  is  the  same. 
For  the  time  being,  however,  we  shall  consider  only 
those  problems  which  arise  when  the  middleman  is  used 
as  the  agency  of  demand  creation.  It  cannot  be  over- 
looked of  course  that  this  is  by  no  means  the  only  func- 
tion which  he  has  exercised  in  the  past  and  continues 
in  many  cases  still  to  exercise. 

The  present  tendency  of  many  producers  to  go  around 
the  middleman  and  eliminate  him  entirely  or  as  fast  as 
possible  from  their  schemes  of  distribution  cannot 
rightly  be  understood  without  review  of  what  these  his- 
torical functions  are.  Nor  can  the  current  conditions 
which  enter  as  factors  in  the  problems  of  demand  crea- 
tion be  explained  without  analysis  of  these  functions  and 
their  influence  on  the  producer's  relations  with  the 
middleman.    These  functions  may  be  listed  as  follows: 

1.  Sharing  the  risk. 

2.  Transporting  the  goods. 

3.  Financing  the  operations. 

4.  Selling  or  demand  creation. 

5.  Assembling,  assorting,  and  reshipping  the  goods. 
Each  of  these  functions  was  at  first  divided  among  a 

series  of  middlemen,  the  selling  agent,  the  wholesaler, 
and  the  retailer  each  assuming  his  part  in  turn.   Each 

157 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

middleman  took  the  risk  that  the  goods  might  lose 
value  or  go  stale  on  his  hands,  just  as  he  bore  the  hazard 
of  destruction,  damage,  or  theft  of  the  goods  while  he 
held  title.  Each  took  the  chance  of  credit  losses.  Each 
paid  a  proportion  of  the  transportation  charges  from  the 
producer's  stock  room  to  the  consumer's  hands.  Each 
had  a  part  in  financing  the  entire  operation.  Each  as- 
sumed a  share  of  the  work  of  selling,  of  creating  for 
the  goods  he  had  purchased  a  demand  in  an  outer  circle 
of  middlemen  or  the  final  circle  of  consumers.  And 
each  performed  part  of  the  task  of  assembling,  assort- 
ing, and  reshipping  the  goods  to  make  them  physically 
available  for  consumption. 

In  many  instances  the  middleman  exercises  these 
same  five  groups  of  functions  to-day.  If  he  overesti- 
mates the  probable  demand  for  an  article  or  line,  he 
pays  the  penalty  for  his  bad  judgment  when  he  clears 
his  stock  at  the  end  of  the  season.  If  he  encounters  a 
season  of  depression  with  heavy  stocks,  the  loss  is  his 
so  long  as  he  remains  solvent.  And  unless  he  transfers 
his  liability  by  paying  an  insurance  premium,  he  as- 
sumes the  risk  of  loss  or  damage  in  his  warehouse  or 
while  the  goods  are  in  transit.  Frequently  he  delivers 
the  merchandise  to  his  customers  by  team  or  motor 
truck,  especially  if  he  is  a  wholesaler  supplying  a  large 
city  and  suburban  trade,  or  a  retailer  in  a  city  where 
consumers  are  accustomed  to  such  service.  All  along 
the  line,  the  middleman  (except  when  he  makes  a  virtue 
of  demanding  cash  payments  by  offering  reduced  prices) 
lends  his  credit  to  his  customers  and  thus  finances  the 
selling  operation. 

His  business  is  primarily  to  sell,  but  at  times  his  man- 
ner of  performing  this  function  presents  one  of  the  pro- 

158 


THE  MIDDLEMAN 

ducer's  gravest  problems  in  distribution  policy.  The 
attitude  of  many  middlemen  toward  a  new  product  or  a 
new  line  seems  to  be  one  of  indifference  or  even  latent 
hostility,  unless  it  offers  for  some  standard  commodity 
a  substitute  which  can  be  handled  more  easily  or  at  a 
greater  profit.  Middlemen  of  this  type  virtually  say  to 
the  manufacturer:  "  Create  a  demand  for  your  goods 
and  I  will  handle  them.  I  am  here  to  give  my  custom- 
ers what  they  ask  for,  not  to  make  a  market  for  some- 
thing they  know  nothing  about," 

There  is  no  denying  that  they  have  sound  and  prac- 
tical reasons  for  this  attitude.  Hardly  a  day  passes  that 
the  wholesale  merchant  is  not  importuned  to  buy  and 
push  some  new  branded  product  which  can  hardly  be 
distinguished  from  one  or  perhaps  a  dozen  like  it  which 
he  already  has  in  stock.  If  he  yields,  it  means  that  he 
puts  an  additional  load,  however  small,  on  his  financing, 
on  his  stock-keeping,  on  his  selling,  and  indeed  on  every 
department  of  his  business.  One  item,  of  course, 
would  not  be  much  of  a  burden;  but  multiply  that  item 
by  five  hundred  or  a  thousand  in  a  year  (the  latter  is  not 
an  impossible  estimate  in  many  lines)  and  the  risk  of 
loss  and  spoilage  becomes  so  great  as  to  justify  a  defen- 
sive policy.  The  same  problem  on  a  lesser  scale  con- 
fronts the  retailer.  No  wonder,  therefore,  that  middle- 
men of  all  classes  look  with  disfavor  on  a  new  substitute 
for  established  brands  unless  they  can  see  in  it  an  extra 
profit  or  a  ready  market. 

Because  they  exercise  the  final  functions  of  assembling 
and  forwarding  merchandise  stocks,  assorted  according 
to  their  customer's  needs  or  expressed  desires,  the  influ- 
ence of  middlemen  on  the  choice  of  commodities  is  very 
great.  Their  negative  attitude  toward  demand  creation 

169 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

in  many  lines,  coupled  with  this  power  of  influencing 
purchasers,  has  already  affected  the  relations  between 
manufacturer  and  middleman  and  will  undoubtedly 
work  further  and  radical  changes  in  our  system  of  dis- 
tribution. 

In  certain  lines  the  middleman  frequently  takes  on  the 
constructive  function  of  financing  the  producer  directly 
and  indirectly.  Many  of  the  cotton  mills  of  the  South 
were  built  with  capital  furnished  by  northern  selling 
agents  and  their  associates.  Often,  too,  the  wholesaler 
indorses  the  commercial  paper  of  the  manufacturer  and 
thus  indirectly  finances  production.  In  the  textile  in- 
dustry of  New  England,  such  "  two-name  "  paper  is 
quite  common,  and  it  is  frequently  met  with  in  other 
trades  where  the  design  and  manufacture  of  the  goods 
and  their  movement  to  the  ultimate  consumer  occupy  a 
considerable  cycle  of  time.  Certain  it  is  that  in  all  cases 
the  middleman  materially  shortens  the  period  of  in- 
vestment on  the  part  of  the  producer  and  enables  him 
to  make  more  rapid  turnovers. 

At  a  relatively  early  date  in  modern  distribution  be- 
gan the  taking  over  entire  of  certain  single  functions, 
which  each  middleman  had  been  performing  in  part. 
The  most  notable  functional  middlemen  to  emerge  thus 
far  are  the  insurance  companies,  the  direct  transporta- 
tion companies,  and  the  commercial  banks.  The  insur- 
ance company  in  a  real  sense  performs  a  middleman's 
function  when  it  assumes  the  hazard  of  damage  or  loss 
by  fire,  by  flood,  by  theft,  by  wTcck,  by  non-delivery 
on  time,  and  by  all  the  other  mishaps  to  which  goods  are 
exposed  on  their  journey  from  factory  to  consumer.  Fur- 
ther, the  insurance  company  is  ready  to  assume  practi- 
cally the  entire  element  of  risk,  to  guarantee  credits,  to 

160 


THE  MIDDLEMAN 

warrant  the  honesty  of  salesmen,  agents,  delivery  men, 
and  other  employees,  to  assume  the  liability  for  injury  to 
persons  or  property  incident  to  operation,  even  to  reim- 
burse a  commercial  institution  like  a  department  store 
or  specialty  shop  for  failure  to  earn  profits  because  of 
weather  unfavorable  to  seasonal  trade. 

In  much  the  same  manner  the  great  transportation 
companies,  railroads,  ocean  steamship  lines,  express 
companies,  and  more  recently  the  domestic  and  inter- 
national parcel  posts,  undertake  and  perform  an  im- 
portant oflSce  originally  shared  with  the  producer  by 
successive  fractional  middlemen. 

In  financing  the  operations  of  distribution,  too,  the 
bank  has  gone  a  long  way  toward  relieving  the  middle- 
man of  his  burden.  By  making  advances  on  merchan- 
dise stocks,  on  open  accounts,  and  on  commercial  paper, 
it  has  absorbed  much  of  the  function  of  finance  in  distri- 
bution. There  are  exceptions,  as  noted  above  in  the 
textile  and  other  long-cycle  industries,  but  in  the  main 
the  bank,  with  associated  agencies  like  commercial-paper 
brokers,  has  been  long  recognized  as  an  indispensable 
functional  middleman  in  the  marketing  process.  The 
establishment  of  the  federal  reserve  bank  system,  with 
its  power  to  rediscount  acceptable  "  two-name  "  paper 
and  bills  of  exchange,  has  led  to  further  extension  of 
banking  activities  in  this  field.  The  application  of  the 
corporate  form  to  industrial  organization  has  also  con- 
tributed to  the  producer's  financial  power  by  making  it 
possible  for  him  to  secure  adequate  working  capital  with- 
out sharing  or  surrendering  control  of  operations  at  any 
point. 

Development  of  these  functional  middlemen  has  re- 
lieved the  wholesaler  and  retailer  of  certain  onerous 

161 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

activities;  in  theory,  at  least,  he  is  left  free  to  concen- 
trate on  his  remaining  functions  of  demand  creation  and 
physical  supply  of  the  merchandise  which  his  customers 
require.  In  a  measure  his  field  of  demand  creation  has 
been  encroached  upon,  either  as  a  consequence  of  his 
indifference  to  particular  commodities  based  on  wide 
possible  choice  among  rival  products  or  because  of  the 
manufacturer's  compelling  interest  in  maximum  sales. 
Beyond  question,  producer  advertising  can  be  regarded 
as  a  general  or  direct  appeal,  according  to  its  character, 
which  tends  to  supplant  the  dealer's  efforts  in  the  stim- 
ulating of  a  consumer  market. 

The  advertising  medium  or  agency  is  in  this  sense  as 
truly  a  functional  middleman  as  either  the  insurance 
company,  the  railroad,  or  the  bank.  But  it  is  more  re- 
cent in  origin  and  more  undeveloped  in  operation.  Ad- 
vertising has  as  yet  few  dependable  standards  to  direct 
the  use,  for  instance,  of  coincident  newspaper,  mag- 
azine, letter  and  circular  campaigns  —  especially  when 
they  are  conducted  in  cooperation  with  middlemen. 

This  inability  to  coordinate  activities  which  can  only 
partly  be  controlled  (though  the  entire  expense  must  be 
charged  up  against  the  product  as  delivered  to  the  con- 
sumer) and  thus  reduce  duplication  of  effort,  counts 
heavily  against  the  efficiency  of  advertising.  Coupled 
with  the  indifferent  attitude  of  the  middleman,  it  may 
account  for  what  seems  to  many  keen  students  an  ap- 
parent tendency  to  eliminate  the  middleman  in  demand 
creation.  It  is  one  phase,  perhaps,  of  a  general  move- 
ment looking  to  the  integration  of  industries,  to  the  con- 
trol and  coordination  of  all  the  activities  involved  in 
production  and  distribution,  from  the  supply  of  raw 
materials  for  the  factory,  to  the  laying  down  of  the  mer- 

162 


THE  MIDDLEMAN 

chandise  at  the  consumer's  receiving  platform  or  the 
back  door  of  his  residence. 

This,  indeed,  is  the  producer's  vital  problem:  Shall 
I  sell  direct  or  through  the  trade?  And  if  my  goods 
move  to  the  consumer  through  the  recognized  channels, 
shall  I  depend  on  the  successive  middlemen  to  do  all 
or  any  part  of  the  work  of  demand  creation?  Or  can  I 
take  on  the  entire  burden  of  advertising  and  selling 
without  prohibitive  increase  of  expense  and  leave  to  the 
wholesaler  and  retailer  only  the  function  of  physical 
supply,  of  stocking  my  products  and  handling  them  out 
to  the  customer  when  they  are  called  for? 

Modern  practice  embraces  the  entire  range  of  possible 
procedure,  from  absolute  dependence  on  the  middleman 
for  demand  creation  through  every  degree  of  coopera- 
tion in  selling  to  complete  assumption  by  the  manufac- 
turer of  the  task  of  developing  and  holding  a  market  for 
his  goods.  A  great  number  of  branded  and  nationally 
advertised  food  products  illustrate  this  last  stage; 
trade-marked  and  advertised  lines  of  clothing,  tools, 
household  appliances,  and  the  like  occupy  the  interme- 
diate positions  marked  by  cooperative  selling;  while 
thousands  of  commodities  prepared  by  concerns  which 
limit  their  activities  to  production  alone  represent  the 
first  extreme  of  marketing  dependence. 

Price  and  conditions  of  supply  being  equal,  the  mid- 
dleman will  naturally  prefer  to  handle  those  products 
which  require  the  minimum  of  effort  to  move  along  to 
the  next  circle  in  distribution,  which  necessitate  the  ex- 
ercise only  of  those  functions  of  assembling,  assorting, 
and  reshipping  which  fall  under  physical  supply.  And 
here  lies  the  crux  of  the  producer's  problem.  The  sys- 
tem of  discounts  to  dealers  which  has  been  more  or  less 

163 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

traditional  assumes  that  the  middleman  performs  his 
share  of  all  the  functions  of  distribution.  The  middle- 
man may  readily  consent  to  delegate  all  the  work  of 
demand  creation  to  the  producer,  but  in  doing  so  he 
only  reluctantly  surrenders  any  considerable  part  of 
his  customary  recompense. 

On  certain  branded  and  widely  advertised  products, 
the  dealer  perforce  accepts  a  reduced  unit  profit,  partly 
because  this  is  compensated  by  the  large  number  of 
unit  sales  and  partly  because  the  consumer  allows  him 
no  choice.  When  a  customer  asks  for  Ivory  soap  or 
Holeproof  hosiery,  Kellogg's  corn  flakes  or  Uneeda 
biscuits,  the  retailer  must  either  supply  the  requested 
product,  sell  a  substitute  against  a  definite  prejudice, 
or  risk  the  customer's  departure  and  a  black  mark 
against  his  store.  The  wise  dealer  stocks  the  popular 
brands,  therefore,  even  though  the  profit  per  sale  is  less 
than  for  a  non-advertised  substitute.  The  difference  is 
his  contribution  to  the  manufacturer's  campaign  of  de- 
mand creation,  though  he  does  not  always  recognize  it 
as  such. 

The  wholesaler  in  his  turn  feels  the  pressure  of  the  con- 
sumer's demand  when  the  retailer  orders ;  he  also  makes 
contribution  to  the  demand-creation  fund  of  the  pro- 
ducer. In  the  case  of  established,  advertised  brands, 
middlemen  as  a  rule  accept  the  situation;  to  new  trade- 
marked  products  they  are  generally  less  hospitable. 
With  both,  many  of  them  put  all  their  emphasis  on  the 
promotion  of  competing  articles  which  they  themselves 
control  or  which  carry  a  higher  margin  of  profit.  Con- 
sumers can  often  be  influenced  to  buy  these. 

That  the  wholesaler  and  retailer  should  expect  pay- 
ment for  a  function  which  they  have  wholly  or  partially 

164 


THE  MIDDLEMAN 


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165 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

ceased  to  perform  is  explicable  on  the  ground  of  tradi- 
tion. The  middleman  has  had  a  long-established  though 
shifting  position  in  the  development  of  organized  dis- 
tribution. It  is  true  that  the  history  of  his  functions 
has  not  been  adequately  studied  and  that  only  tentative 
outlines  of  his  evolution  can  be  drawn.  Pending  the 
fuller  study  which  the  subject  should  receive,  even  a  cur- 
sory and  incomplete  sketch  may  assist  in  giving  the 
manager  a  sense  of  direction. 

The  middleman,  as  we  know  him,  is  a  product  of  a 
complex  industrial  organization.  Chart  I  attempts  to 
give  in  graphical  form  a  rough  notion  of  his  evolution 
from  the  remote  time  when  producer  dealt  directly  with 
consumer  to  the  rise  of  the  factory  system  in  England 
and  the  development  late  in  the  eighteenth  century  and 
early  in  the  nineteenth  of  what  may  be  called  the  ortho- 
dox type  of  distribution.  Under  the  primitive  rule  of 
barter,  the  producer  became  a  trader  only  at  intervals 
when  he  had  accumulated  a  surplus  of  skins  or  cattle  or 
hunting  gear  and  conceived  these  as  of  less  value  than 
something  a  neighbor  possessed.  We  find  him  as  a 
craftsman,  traveling  from  house  to  house  to  make  up 
the  consumer's  own  raw  material  into  shoes  or  harness 
or  clothing,  or  attaching  himself  to  the  household  of 
some  nobleman.  Then  as  the  crafts  became  specialized 
and  settled  occupations  and  the  town  appeared,  the 
craftsman  producer  took  on  the  functions  of  retailer, 
making  to  order  or  on  occasion  selling  directly  from 
stock. 

As  the  market  widened  and  the  merchant  appeared  as 
an  organizer  of  trade,  the  producer  concerned  himself 
solely  with  making  things,  in  many  cases  becoming 
practically  an  employee  of  the  merchant  who  provided 

166 


THE  MIDDLEMAN 

the  stock  and  capital,  took  all  the  risks  entailed,  and 
sold  the  jSnished  goods  in  his  own  shop  and  at  neigh- 
boring town  markets.  Steadily  this  system  of  trading 
widened  until  there  was  a  metropolitan  market  for  goods 
of  certain  recognized  types  and  qualities.  While  on  one 
side  the  merchant  became  more  definitely  a  wholesaler, 
disposing  of  the  goods  he  took  from  the  producer  to  dis- 
tant retail  merchants  who  in  turn  distributed  them  to 
the  consumers,  on  the  other  side  the  merchant-pro- 
ducer gradually  strengthened  his  financial  position  and 
grew  in  importance.  Assuming  all  the  risks  of  pro- 
duction, he  distributed  his  product  through  various 
wholesalers  who  sold  in  turn  to  retailers,  the  latter  sup- 
plying the  consumers.  As  a  world  market  appeared, 
the  producer  disposed  of  a  part  of  his  product  to  the 
exporting  and  importing  houses  which  carried  domestic 
goods  beyond  the  seas  and  brought  back  foreign  luxuries 
and  necessities  for  home  consumption.^ 

^  In  Defoe's  "  Tour  of  Great  Britain,"  -wTitten  about  1725  (Volume  II, 
Letter  II),  also  quoted  in  C.  J.  Bullock's  "Selected  Readings  in  Economics," 
beginning  on  page  325  we  get  vivid  and  entertaining  glimpses  of  the  activi- 
ties of  both  merchant  wholesalers  and  retailers  full  two  generations  before 
the  industrial  revolution  gave  its  tremendous  impetus  to  English  trade.  In 
one  chapter  he  reports  the  departiu-e  of  a  merchant's  representative  for  a 
trip  through  the  provinces,  which  might  outlast  a  year,  in  such  state  and 
splendor  as  no  modern  salesman  could  hope  to  emulate.  In  another  passage 
he  describes  the  manner  of  retail  and  wholesale  trade  at  the  great  Sturbridge 
fair,  one  of  the  typical  markets  of  the  time,  ^ath  the  same  feeling  for  detail 
which  makes  "  Robinson  Crusoe  "  seem  a  transcript  from  the  experience  of  a 
shipvsTecked  sailor.   Here  is  his  picture  of  the  retail  section: 

"  It  is  impossible  to  describe  all  the  Parts  and  Circumstances  of  this  Fair 
exactly;  the  Shops  are  placed  in  Rows  like  streets,  whereof  one  is  called 
Cheapside;  and  here,  as  in  several  other  Streets,  were  all  Sorts  of  Traders, 
who  sell  by  retail,  Brasiers,  Turners,  Milaners,  Haberdashers,  Hatters, 
Mercers,  Drapers,  Peirt-terers,  Chinawarehouses,  and,  in  a  word,  all  Trades 
that  can  be  found  in  London.  I  might  proceed  to  speak  of  several  other 
Sorts  of  English  Manufactures,  which  are  brought  hither  to  be  sold;  as  all 
Sorts  of  wTOught  Iron,  and  Brass  Ware  from  Birmingham,  edged  Tools, 
Knives,  etc.  from  Sheffield;    glass  wares,  and  Stockens,  from  Nottingham 

167 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

After  the  advent  of  the  factory  system,  producers 
tended  to  lose  their  character  as  merchants  and  to  de- 
vote themselves  wholly  to  the  management  of  their 
works  and  the  invention  and  betterment  of  methods 
and  machines.  The  chief  reason  for  this,  as  we  saw  in 
an  earlier  chapter,  was  that  the  market  constantly  out- 
ran production.  The  problem  was  not  so  much  to  create 
a  demand  as  to  manufacture  goods  to  supply  it.  The 
pressure  was  all  to  increase  the  rate  of  output.  With 
the  division  of  labor  and  the  growing  intricacy  of  oper- 
ations, manufacturers  found  it  both  necessary  and 
profitable  to  concentrate  their  attention  on  production. 

To  relieve  them  of  the  alien  task  of  merchandising, 
the  selling  agent  appeared  as  a  new  link  in  the  chain  of 
distribution.  He  undertook  to  dispose  of  the  total 
product  of  the  factory  to  wholesale  merchants.  These 
in  turn  supplied  retailers,  and  the  retailers  the  consum- 
ing public.  So  long  as  the  demand  exceeded  output, 
this  arrangement  satisfied  all  hands;  but  as  mill  capac- 
ity outgrew  the  market,  the  producer  discovered  him- 

and  Leicester;  and  unaccountable  Quantities  of  other  things  of  similar 
Value  every  Morning." 

His  account  of  the  wholesale  market  has  added  interest  because  it  sets 
forth  as  an  established  trading  process  what  must  have  been  sale  by  sample, 
if,  indeed,  it  was  not  that  most  modern  of  merchandising  expedients,  sale  by 
description.  And  this  was  a  century  before  the  widespread  use  of  power 
machinery  in  the  industries  made  uniformity  of  product  easy  of  attainment. 

"  Besides,"  Defoe  writes,  "  the  prodigious  Trade  carried  on  here  by 
Wholesalesmen  from  London,  and  all  Parts  of  England,  who  transact  their 
business  wholly  in  their  Pocket-books;  and,  meeting  their  Chapman  from 
all  parts,  make  up  their  accounts,  receive  Money  chiefly  in  Bills,  and  take 
orders.  These,  they  say,  exceed  by  far  the  Sales  of  Goods  actually  brought 
to  the  Fair,  and  delivered  in  Kind;  it  being  frequent  for  the  London  Whole- 
salesmen  to  carry  back  orders  from  their  Dealers,  for  10,000  Pounds-worth 
of  Goods  a  Man,  who  deal  in  heavy  Goods,  as  Wholesale  Grocers,  Salters, 
Brasiers,  Iron  merchants.  Wine-merchants,  and  the  like;  but  does  not  ex- 
clude the  dealers  in  Woolen  manufacturers,  who  generally  manage  their 
Business  in  this  Manner." 

168 


THE  MIDDLEMAN 

self  at  a  serious  disadvantage.  The  outlet  for  his  goods 
was  controlled  by  middlemen;  but  while  he  had  been 
designing  machinery,  reducing  costs,  perfecting  quality, 
the  middleman  had  intrenched  himself  with  the  trade  as 
the  source  of  its  supplies.  The  manufacturer,  isolated 
from  the  consumer  and  with  fixed  charges  which  com- 
pelled him  to  operate  continuously  or  lose  money, 
found  the  intervening  middleman  exerting  pressure  to 
force  him  to  accept  a  narrow  margin,  even  at  times  to 
operate  without  any  profit  at  all. 

The  middleman,  too,  was  the  creator  and  definer  of 
demand.  Any  attempt  of  the  manufacturer  to  differ- 
entiate his  product  and  thus  lift  it  out  of  the  ruck  of 
staples  was  subject  to  the  approval  of  the  middleman, 
who  might  veto  it  because  it  introduced  an  untried  ele- 
ment into  his  selling  plan.  To  escape  this  limitation, 
the  stronger  producers  in  many  lines  have  assumed  the 
neglected  function  of  demand  creation  and  have  sought 
ways  of  going  around  the  selling  agent,  the  wholesaler, 
and  even  the  retailer  in  order  to  establish  a  closer  con- 
tact with  consumers  of  their  goods. 

The  development  of  this  tendency  to  reduce  the  num- 
ber of  factors  intervening  between  the  consumer  and 
the  sources  of  the  goods  he  needs  is  one  of  the  dis- 
tinguishing characteristics  of  modern  business.  Pro- 
ducers assert  that  the  movement  has  been  an  effort  not 
so  much  to  get  rid  of  the  middleman  as  to  eliminate 
payment  for  functions  which  the  middleman  no  longer 
performs.  The  question  narrows  down,  they  declare, 
to  this :  Shall  there  be  double  pay  for  a  single  perform- 
ance of  the  function  of  demand  creation .f^  Since  the 
product  pays  the  charges,  it  is  vital  for  them  to  dis- 
cover a  more  economical  way  of  creating  and  supplying 

169 


AN  APPROACH  TO  BUSINESS  PROBLEMS 


170 


THE  MIDDLEMAN 

demand  than  through  the  orthodox  channels,  if  such  a 
way  exists.  It  is  not,  as  we  shall  see,  a  narrowly  eco- 
nomic problem,  but  one  in  which  the  human  element 
is  frequently  preponderant. 

Salesmen  and  advertising  have  been  the  agencies 
of  the  producer's  gradual  approach  to  the  consumer. 
Chart  II  illustrates  the  growth  of  the  tendency  to  drop 
out  successive  middlemen.  The  first  step  is  to  secure 
a  measure  of  independence  from  the  selling  agent 
without  actually  parting  company,  by  sending  sales- 
men to  call  upon  wholesalers,  to  show  samples,  get 
suggestions  and  book  orders,  and  by  advertising  di- 
rected at  retailers  (and  sometimes  at  the  jobber  as 
well)  to  exploit  the  goods  before  they  are  ready  to  be 
shown  and  thus  create  a  demand  for  them  in  anticipa- 
tion of  the  market  season. 

In  the  next  stage  of  the  evolution  the  merchant- 
producer  takes  on  more  and  more  of  the  functions  of 
demand  creation,  both  primary  and  secondary,  sup- 
plementing the  salesmen  who  call  on  wholesalers  with 
others  who  carry  the  work  of  education  down  to  the 
retailer  and  extending  his  dealer  advertising  to  take 
in  the  consumer.  This  is  the  intermediate  stage  to 
which  the  great  mass  of  progressive  producers  have 
advanced  at  present,  when  the  "  specialty  salesman  " 
is  almost  as  common  a  visitor  in  the  larger  retail  store 
as  are  the  representatives  of  the  jobbers  from  whom 
the  dealer  buys.  "  Specialty "  in  the  dry  goods, 
grocery,  hardware,  and  shoe  trades  usually  means  a 
differentiated  and  trade-marked  staple.  No  matter 
who  books  the  orders,  they  usually  pass  through  the 
regular  jobber's  hands.  The  latter  usually  acquiesces 
in  this  plan  because  it  relieves  his  road  men  of  the 

171 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

burden  of  selling  and  gives  them  more  time  to  push 
other  lines  without  sacrificing  profit. 

Often  this  results  in  another  step  in  the  evolution  of 
the  merchant-producer.  Having  direct  and  satisfactory 
connections  with  the  retailer,  the  producer  decides  to 
eliminate  the  wholesaler  and  save  a  discount,  especially 
if  his  product  has  no  great  weight  or  bulk  and  reorders 
can  be  forwarded  quickly  by  express  or  parcel  post.  He 
keeps  in  touch  with  his  dealers  through  salesmen  and 
advertising,  using  the  latter  and  frequently  the  former 
to  stimulate  and  renew  the  consumer's  appreciation  of 
his  goods.  If  he  has  a  widely  advertised  and  very  de- 
sirable line,  he  can  even  demand  a  contract  with  a  sales 
quota  guaranteeing  a  certain  volume  of  orders,  and  can 
secure  the  adoption  of  those  methods  of  display,  pro- 
motion, and  selling  which  experience  has  proved  best 
for  his  products. 

From  this  vantage  ground  the  manufacturer  can 
make  one  further  advance,  to  complete  independence  of 
middlemen  and  absolute  control  of  his  trade.  He  can 
establish  his  own  retail  stores  —  witness  the  success  of 
certain  notable  shoe  and  tobacco  "  chains."  With  a 
smaller  outlay  of  capital  he  can  make  exclusive  con- 
tracts with  going  concerns,  as  in  the  drug  trade,  which 
insure  his  goods  against  competition  in  that  store 
through  a  profit-sharing  clause.  Again,  he  can  take  the 
mail-order  route,  using  general  and  direct  advertising  to 
reach  consumers  and  create  his  demand,  and  railroads, 
express  companies,  and  the  parcel  post  to  deliver  his 
merchandise.  If  he  be  a  manufacturer  of  another  class 
of  "  specialties,"  such  as  machinery  or  labor-saving  de- 
vices for  the  oflBce,  factory,  store,  farm,  or  household, 
which  require  a  high  order  of  intelligence  and  skill  to 

172 


THE  MIDDLEMAN 

sell  them  to  selected  prospects,  he  will  find  it  economi- 
cal to  employ  both  salesmen  and  advertising  in  his 
work  of  demand  creation. 

This  tendency  to  decrease  the  number  of  distinct 
ownerships  through  which  goods  pass  on  the  way  to  the 
consumer  will  probably  show  further  development  in 
the  future  unless  new  factors  appear.  The  attempts 
of  wholesalers  and  retailers  to  check  the  growth  of 
direct  selling  or  semi-direct  selling  through  the  mail- 
order houses,  while  in  many  cases  raising  the  efficiency 
of  the  middlemen  themselves,  have  not  seriously  in- 
convenienced the  rival  agencies.  Concerted  action  to 
force  the  producer  to  dispose  of  his  output  through 
regular  trade  channels  has  taken  at  times  the  form  of  a 
virtual  boycott.  But  even  if  this  were  of  itself  the 
most  effective  method,  the  attitude  of  the  federal  and 
state  governments  would  probably  discourage  it. 

Much  more  significant  is  the  movement  among  job- 
bers to  establish  their  own  house  brands,  thus  reviv- 
ing the  conditions  which  obtained  in  production  and 
distribution  before  the  manufacturer  sought  emancipa- 
tion from  the  middleman.  Neither  this  nor  the  re- 
markable growth  of  the  chain  store  nor  the  growth  of 
the  cooperative  trading  associations  should  be  left  out 
of  the  manager's  calculations.  Buying  associations 
have  been  organized  by  the  "  regular  "  retailers  of  many 
cities  and  districts  to  meet  the  new  condition.  How 
nearly  each  of  these  systems  will  balance  the  others  and 
what  effect  antagonistic  factors  will  have  on  the  final 
adjustment  of  distribution  are  still  matters  of  spec- 
ulation. 

For  the  individual  manufacturer,  however,  they  have 
a  practical  aspect.    In  many  localities  the  chain  store 

173 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

and  the  retail  buying  association  present  immediate 
problems.  Is  it  sound  policy,  for  instance,  to  ignore  the 
tremendous  distributive  power  of  the  "  chains  "  in  a 
city  like  Philadelphia,  St.  Louis,  or  New  York  because 
of  the  prejudice  the  regular  trade  holds  against  them.? 
The  sales  manager  of  one  of  the  large  cereal  companies 
not  long  since  declared  that  the  profits  v.hich  his  com- 
pany sacrificed  by  refusing  to  sell  to  chain  stores  in 
Philadelphia  alone  amounted  to  tens  of  thousands  of 
dollars  yearly.  He  put  his  problem  and  the  problem  of 
every  manufacturer  whose  product  by  its  nature  must 
be  handled  through  middlemen  into  a  single  query  to 
the  trade. 

"  Will  you,"  he  asked  in  substance,  "  cooperate  with 
us  and  push  our  breakfast  foods  a  little  harder  to  make 
up  for  a  loss  which  is  due  to  our  policy  of  protecting  your 
interests  in  this  respect?  Or  shall  we  throw  down  the 
bars  to  chain  stores  and  take  all  the  orders  which  rightly 
come  to  us.?  "  It  happens  that  this  cereal  company  has 
been  most  scrupulous  in  avoiding  sales  policies  which 
were  not  frank  and  fair  to  middlemen.  This  extraor- 
dinary appeal  of  the  sales  manager,  therefore,  would 
seem  to  indicate  that  in  the  orthodox  machinerj^  of  dis- 
tribution there  is  sometimes  serious  leakage  of  good 
will  and  the  spirit  of  cooperation. 

This  orthodox  system  is  organized  on  a  basis  of 
hastened  profit.  In  normal  seasons  the  selling  agent,  in 
touch  with  the  market  and  its  current  wants  or  fancies, 
takes  over  the  producer's  output  at  a  price  which  allows 
him  to  dispose  of  it  to  wholesalers  at  a  substantial  ad- 
vance, yet  stUl  leaves  the  jobber  a  satisfactory  margin 
when  the  goods  are  moved  along  to  the  retailer.  Again, 
the  dealer's  inducement  to  purchase  is  not  primarily  the 

174 


THE  MIDDLEMAN 

quality  or  service  the  merchandise  offers,  but  the  oppor- 
tunity to  resell  to  the  consumer  at  a  profit. 

Not  until  the  storekeeper  displays  the  commodity 
before  the  customer  or  considers  what  shall  be  the  ap- 
peal of  an  advertisement  does  the  stress  fall  on  style, 
utility,  durability,  or  service  as  a  buying  argument. 
In  brief,  the  demand-creating  ideas  about  the  goods 
vary  at  different  stages  in  the  process  of  distribution,  by 
reason  of  the  different  viewpoints  of  those  who  buy  for 
resale  and  those  who  buy  for  use  or  consumption.  Price 
and  salability  are  the  essential  factors  to  the  middle- 
man; with  the  consumer,  quality  and  service  must 
balance  cost,  or  dissatisfaction  ensues. 

Analysis,  not  indictment,  of  current  practice  in  the 
distribution  of  unbranded  commodities  is  the  purpose 
of  these  paragraphs.  I  do  not  mean  to  convey  the  im- 
pression that  wholesalers  and  retailers  generally  con- 
sult no  other  standards  than  price  and  salability  when 
they  lay  in  their  stocks.  Within  certain  limits  price 
is  here  also  a  question  of  comparative  values;  and  the 
merchant  who  does  not  employ  some  measure  of  value 
in  his  buying  will  soon  have  the  mistake  called  to  his 
attention  by  the  complaints  of  his  customers  or  their 
neglect  of  his  offerings.  He  may  capitalize  for  one  or 
two  seasons  an  earned  reputation  for  fair  prices  and 
foist  on  his  trade  goods  of  inferior  quality ;  or  if  he  be  a 
retailer  with  a  store  in  a  large  city,  he  may  continue  this 
policy  indefinitely  because  he  has  a  mass  of  fresh  pros- 
pects to  draw  upon.  As  a  matter  of  fact,  the  most  suc- 
cessful wholesale  houses  and  retail  stores  in  the  country 
are  those  which  apply  rigid  tests  for  quality  and  service 
to  the  commodities  they  purchase,  both  for  their  own 
protection  and  for  the  benefit  of  their  customers. 

175 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

Before  buying  goods  not  trade-marked  they  go  so 
far  as  to  inspect  minutely  the  factories  where  they  are 
made,  the  raw  materials,  the  processes.  They  count 
the  number  of  threads  to  the  square  inch  in  textiles, 
the  number  of  knots  in  carpets.  They  use  chemical  tests 
to  determine  the  proportion  of  cotton  in  mixed  silk  and 
woolen  goods.  They  expose  colored  fabrics  to  the  action 
of  sun,  wind,  and  weather  to  determine  the  permanency 
of  the  dye  and  their  wearing  qualities.  They  sample 
canned  goods  and  packaged  foods  of  all  kinds  to  make 
sure  of  their  character  and  freshness.  They  even  employ 
production  engineers  to  analyze  the  items  in  their  prin- 
cipal lines  and  estimate  the  factory  cost  of  each  as 
checks  on  the  prices  quoted  by  the  manufacturers. 

Because  of  training  and  superior  intelligence,  too, 
their  buyers  usually  are  keener  judges  of  value  than  the 
factory  inspectors  who  spend  their  lives  passing  on  the 
same  kinds  of  goods;  and  this  knowledge  and  judgment 
is  exercised  every  time  a  new  sample  comes  under  their 
eye  or  a  new  consignment  is  received  in  the  stock  rooms. 
The  big  department  stores  recognize  three  grades  of 
quality  in  their  major  lines,  a  best,  a  medium,  and  a  low- 
priced  line,  but  no  effort  is  spared  to  make  each  grade 
represent  the  utmost  of  value  which  can  be  bought 
within  its  price  range.  The  average  wholesaler  or  re- 
tailer is  content  to  supply  full  lines  in  two  price  ranges, 
grading  upward  or  downward  from  the  medium  ac- 
cording to  the  character  of  his  trade.  The  measure  of 
value  in  many  instances  is  based  on  personal  judgment, 
experience,  and  rule-of-thumb,  but  it  is  applied  with 
painstaking  care. 

Thus  equipped,  the  large  retailer,  knowing  that  his 
customers  look  to  him  to  make  good  any  defective  mer- 

176 


THE  MIDDLEIMAN 

chandise,  even  when  it  carries  the  maker's  name,  fre- 
quently takes  the  final  step  of  assuming  all  responsi- 
bility and  finds  an  anonymous  manufacturer  to  turn  out 
his  clothing,  hardware,  toilet  articles,  silverware,  shoes, 
or  what  not,  according  to  specifications  and  at  a  lower 
price  usually  than  that  which  the  trade-marked  product 
commands. 

Summed  up,  this  struggle  for  integration  —  the  inte- 
gration of  industry  on  the  one  hand,  and  opposing  it  the 
integration  of  trade  —  hinges  on  the  division  of  profit. 
The  manufacturer  is  sometimes  forced,  as  he  views  it, 
to  take  over  the  function  of  demand  creation  because 
he  sees  the  work  neglected  or  ineffectively  performed. 
Naturally  he  is  averse  to  paying  the  middleman  for 
something  the  latter  no  longer  is  required  to  do  for  his 
product,  though  he  recognizes  that  jobbers  and  dealers 
are  effective  instruments  of  physical  supply  and  is 
quite  willing  to  pay  them  for  the  performance  of  this 
function.  On  the  other  hand,  so  long  as  they  continue 
to  be  paid  for  creating  a  demand  for  his  product  he 
naturally  desires  to  see  them  actually  and  adequately 
doing  so. 


177 


CHAPTER  XII 

AGENCIES  OF  DEMAND  CREATION  —  DIRECT 
SALESMEN 

WHEN  a  manufacturer  considers  the  problem  of 
building  permanent  demand  for  his  product,  he 
looks  first  to  those  elements  of  quality  and  service 
which  will  render  his  goods  more  desirable  to  the  con- 
sumer and  more  likely  to  be  bought  repeatedly  as  the 
latter  reenters  the  market.  Without  neglecting  the  fac- 
tors which  appeal  to  the  middleman,  since  the  latter 
must  be  reckoned  with  in  innumerable  lines  as  the  es- 
tablished agency  of  physical  supply,  he  adds  as  much 
of  style,  finish,  or  special  utility  as  his  cost  and  produc- 
tion conditions  will  permit  and  takes  steps  to  insure  that 
his  entire  output  shall  conform  to  this  standard. 

If  he  trade-marks  the  resulting  product  and  its  supe- 
riority to  competing  commodities  is  evident,  he  can 
count  on  a  certain  proportion  of  repeat  orders.  Con- 
sumers who  have  bought  it  will  recall  its  excellence  and 
will  try  to  secure  it  when  they  have  need  of  such  goods 
again.  The  middleman  also  can  be  trusted  to  make  an 
effort  to  stock  it  in  order  to  satisfy  the  consumer's 
desire  to  buy. 

He  finds,  however,  that  at  first  the  chances  of  his  spe- 
cialized product  suffer  in  about  the  same  degree  as  its 
adaptation  to  the  specific  needs  of  the  final  user  (often 
latent  or  unrecognized  needs)  differentiates  it  from  the 
bulk  of  similar  products.  A  soap  for  washing  woolens 
without  shrinking  them  is  likely  to  prove  more  difficult 

178 


DIRECT  SALESMEN 

to  market  through  the  regular  channels,  for  instance, 
than  would  a  laundry  bar  of  the  conventional  size,  shape, 
and  color.  First,  because  its  specific  claims  are  likely  to 
inhibit  its  purchase  and  use  for  any  but  this  particular 
purpose.  And,  second  because  the  "  how  "  and  "  why  " 
of  its  non-shrinking  properties,  to  be  effective  in  the 
creation  of  demand,  must  be  conveyed  accurately  and 
vividly  to  the  minds  of  prospective  users. 

Orders  from  wholesalers  and  retailers,  therefore,  will 
not  entirely  bridge  the  gap  that  separates  the  article 
and  the  consumer.  They  and  their  salesman,  as  a  rule, 
do  not  have  sufficient  time  either  to  master  its  essential 
selling  points  or  adequately  to  present  them  to  their 
customers.  The  qualities  which  appeal  actively  to  mid- 
dlemen, who  buy  for  resale,  are  often  quite  distinct  from 
those  which  attract  the  consumer,  who  is  directly  in- 
terested in  value  and  service  as  well  as  appearance  and 
price.  The  ideas  that  the  retailer  must  communicate 
to  the  consumer,  therefore,  in  order  to  create  in  him  a 
desire  for  the  product  are  not  necessarily  the  ideas  with 
which  the  wholesaler  interested  the  retailer.  Not  until 
the  latter  addresses  himself  to  the  consumer  is  emphasis 
laid  exclusively  upon  the  special  features  which  the 
manufacturer  is  counting  upon  to  make  the  final  sale. 

This  does  not  mean  that  wholesalers  or  retailers  are 
indifferent  to  conspicuous  quality  in  a  product  when  it 
does  not  bear  an  established  trade-mark  or  a  quality 
price  ticket.  Quite  the  contrary.  Such  "  good  buys  " 
strengthen  any  merchandise  line  or  department  stock 
and  add  luster  to  house  and  personal  reputations.  Fre- 
quently, too,  they  provide  opportunities  for  better-than- 
regular  mark-ups  and  corresponding  immediate  profits. 

But  the  great  hindrance  to  maximum  sales  for  a  spe- 

179 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

cialty  through  orthodox  channels  is  that  it  is  difficult 
by  this  system  to  secure  the  individual  handling  at  every 
stage  of  demand  creation  which  a  differentiated  product 
requires.  The  jobber's  salesman  has  hundreds  of  items 
to  display  to  each  dealer  in  the  course  of  a  fev>^  hours. 
The  retail  clerk's  value  is  usually  measured  by  his  sales 
totals  and  his  skill  in  serving  a  maximum  number  of 
customers  in  a  limited  time.  The  transmission  to  the 
consumer,  therefore,  of  the  ideas  necessary  to  sell  any 
given  specialty  call  for  the  intelligence,  efficiency,  and 
good  will  of  at  least  four  persons,  the  jobber  and  his 
salesman,  the  retailer  and  his  clerk.  If  any  one  of  the 
four  is  careless  or  indifferent  or  incompetent,  the  chain 
of  transmission  snaps  and  the  product  is  left  to  make 
a  dumb  appeal  to  the  consideration  of  the  consumer. 

For  an  increasing  variety  of  non-staple  articles,  then, 
the  special  salesman  is  recognized  as  an  essential  agent 
in  demand  creation.  If  the  product  is  simply  a  bet- 
tered staple,  retaining  its  familiar  characteristics  and 
depending  on  refinement  of  design  or  finish  to  recom- 
mend it,  no  particular  urging  is  necessary  to  stimulate 
the  middleman's  interest  and  secure  his  order.  But  any 
advance  in  price  or  decrease  in  quantity  operates  against 
this  easy  acceptance,  even  when  its  specialization  gives 
the  product  an  added  utility. 

Where  the  character,  quality,  or  use  of  the  article  is 
not  evident  but  requires  demonstration  or  the  develop- 
ment of  ideas  unfamiliar  to  the  trade  and  the  consumer, 
the  work  of  transmitting  its  selling  points  to  the  final 
user  through  two  or  more  middlemen  becomes  difficult 
and  uncertain.  And  finally,  the  minimum  of  sales  effort 
is  all  that  can  be  expected  from  the  middleman,  when 
a  trade-marked  product  is  in  direct  competition  with 

180 


DIRECT  SALESMEN 

his  "  liouse  brands  "  or  with  accustomed  articles  which 
with  a  larger  percentage  of  profit  satisfy  his  customers. 

The  producer's  problem,  therefore,  is  to  determine 
whether  a  direct  sales  force  is  necessary  to  create  max- 
imum demand  for  his  goods  with  a  minimum  outlay  of 
money  and  effort.  Enough  has  been  said  to  indicate 
the  sub-problems  which  he  must  address  and  the  factors 
to  be  considered  in  their  solution.  Too  much  stress 
cannot  be  laid  on  the  importance  of  a  fresh  point  of 
view.  The  great  initiatives  in  distribution  during  the 
last  thirty  years  have  all  been  breaks  with  merchandis- 
ing traditions.  The  Butler  system  of  wholesaling  by 
catalogue,  for  instance,  was  a  new  departure.  So  also 
was  the  Larkin  method  of  selling  soap  and  similar  house- 
hold and  personal  requisites  through  consumers'  clubs. 
Another  notable  case  was  the  long-range  retailing  of 
staples  and  specialties  by  mail-order  houses.  These 
revolutions  in  marketing  custom  have  substituted  ad- 
vertising for  personal  solicitation  of  orders,  the  written 
for  the  spoken  word;  yet  at  the  same  time  the  exclusive 
salesman  has  become  a  most  important  agency  of  de- 
mand creation  not  only  for  invented  specialties  but  also 
for  innumerable  lines  developed  from  the  staples  which 
were  formerly  distributed  entirely  through  middlemen. 

Whether  advertising  and  the  producer's  sales  force 
have  usurped  the  middleman's  function  of  demand 
creation  or  were  evolved  to  perform  a  neglected  task  is 
of  no  immediate  moment.  All  three  agencies  exist  and 
are  likely  to  continue  active  as  long  as  individualism 
holds  its  place  in  business.  This  chapter  is  concerned 
primarily  with  the  direct  salesman  and  with  the  prob- 
lems which  his  employment  in  demand  creation  set  up 
for  the  management.  His  relations  with  the  other  agen- 

181 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

cies  or  activities  of  distribution,  production,  and  ad- 
ministration, because  of  their  number  and  complexity, 
can  only  be  touched  upon  here.  The  broader  question 
of  when  and  how  the  different  agencies  of  demand  cre- 
ation can  be  used  independently  or  in  combination  must 
be  reserved  for  discussion  later. 

Nowhere  do  the  policies  of  production  and  distribution 
seem  to  approach  so  closely  as  when  the  common  human 
agent  in  operation  is  considered.  In  an  earlier  chapter 
dealing  with  the  policies  of  production  we  saw  that  the 
manager's  labor  problems  have  to  do  with  four  chief 
contacts  with  his  men:  (1)  hiring,  (2)  training,  (3)  pay- 
ing, and  (4)  directing.  The  common  purpose  guiding 
him  in  all  these  functions  is  to  secure  for  each  dollar  ex- 
pended the  largest  regular  day-by-day  return  in  pro- 
ductive effort.  But  the  workman  is  interested  mainly 
in  the  amount  of  money  in  his  pay  envelope;  the  success 
of  the  manager,  therefore,  is  measured  by  his  skill  in 
utilizing  this  dominant  motive  to  further  his  own  pur- 
pose. His  method  of  fixing  and  paying  wages  may  add 
to  their  pocket  value  by  making  clear  the  definite  rela- 
tion between  the  sum  paid  and  the  amount  and  quality 
of  the  effort  received.  Pride,  ambition,  loyalty  may  be 
awakened;  latent  capacities  may  be  developed.  But 
the  range  of  motives  to  which  the  employer  of  factory 
labor  can  appeal  remains  narrow;  the  wage  system  is 
the  pivot  on  which  most  of  these  must  be  swung. 

The  employer  of  salesmen  has  a  larger  margin  of 
psychological  values  (if  the  phrase  is  permissible)  with 
which  to  work.  As  a  group  or  class,  eflficient  salesmen 
have  marked  characteristics.  The  well-worn  proverb, "A 
salesman  is  born,  not  made,"  had  as  its  kernel  of  truth 
the  fact  that  conspicuous  success  in  selling,  before 

18^ 


DIRECT  SALESMEN 

analysis  was  applied  to  salesmanship  and  training 
courses  were  developed,  was  usually  attendant  on  cer- 
tain personal  or  temperamental  qualities. 

The  typical  salesman  was  ambitious,  intuitive,  quick- 
witted, capable  of  enthusiasms,  and  sympathetic,  or  at 
least  was  able  to  see  his  product  or  service  from  the 
other  fellow's  viewpoint  and  in  terms  of  the  latter's 
needs.  He  was  willing  to  take  a  chance,  not  only  on 
the  closing  of  an  immediate  or  future  order,  but  also 
on  the  possibilities  of  a  new  connection  for  himself. 
His  function  was  to  sell,  to  persuade  prospects  to  buy  his 
merchandise  in  maximum  quantities;  and  frequently 
the  lack  of  balance  which  comes  of  over-emphasis  on 
one  function  led  him  to  oversell  his  customers. 

Now  all  these  qualities,  tempered  by  experience  and 
training,  and  by  a  saner  conception  of  customer  service 
survive  in  the  salesman  of  to-day.  Twenty  years  ago 
they  were  the  natural  qualities  which  marked  a  man 
as  a  potential  salesman  until  some  discerning  employer 
supplied  him  with  a  sample  case,  a  price  list,  and  a  set 
of  mileage  books.  To-day  they  have  been  cultivated  as 
part  of  their  selling  equipment  by  thousands  of  men  and 
developed  in  other  thousands  by  astute  employers. 
Whether  native  or  acquired,  they  may  almost  be  con- 
sidered stock  characteristics  on  which  managers  can 
build  plans  to  secure  sustained  and  maximum  efforts 
from  their  field  forces. 

Not  that  the  economic  motive  can  be  overlooked  in 
dealing  with  salesmen,  any  more  than  in  handling  fac- 
tory workers  or  customers.  But  the  economic  element 
is  nearly  always  relatively  constant;  everyone  must 
pay  the  market  rate  of  wages  and  be  satisfied  with  the 
approximate  market  price  of  his  commodity.    The  ef- 

183 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

ficient  business  man,  then,  is  likely  to  give  his  attention 
to  getting  extra  production  or  extra  sales  volume  by 
appealing  to  motives  outside  and  beyond  the  money 
involved. 

It  is  a  commonplace  of  management,  indeed,  that 
added  pay  alone,  unless  it  be  a  considerable  addition 
to  the  market  rate,  will  not  secure  this  desired  extra 
effort  continuously.  Mechanics  and  "  handy  men  "  will 
work  at  top  speed  over  long  periods  in  plants  like  the 
Ford  motor  works,  not  merely  because  the  pay  is  good, 
but  largely  because  their  jobs  are  coveted  by  so  many 
other  men  outside  the  organization.  This  outside  pres- 
sure reminds  them  constantly  that  their  pay  and  con- 
dition are  exceptional  and  that  exceptional  service  is 
demanded  of  them.  But  only  in  extraordinary  situa- 
tions can  the  average  man  be  prevailed  upon  for  higher 
day  wages  or  a  better  salary  to  put  forth  all  the  produc- 
tive energy  he  possesses.  To  tap  his  reserves,  something 
more  than  a  money  reward  is  required. 

This  is  especially  true  of  men  who  sell  goods.  The 
typical  salesman  is  keen  about  money.  He  insists  on 
receiving  as  much  from  his  present  employment  as  he 
can  command  elsewhere.  It  is  a  point  of  pride  with  him 
that  he  is  paid  as  much  or  more  than  the  average  man 
in  his  line  and  grade.  He  is  more  interested  as  a  rule  in 
his  gross  income  than  in  the  net,  a  fact  that  must  be 
weighed  in  deciding  his  method  of  payment.  If  he  re- 
ceives a  salary  of  $5,000  a  year  and  an  allowance  of 
$2,000  for  expenses,  he  is  likely  to  consider  liimself 
underpaid  as  compared  with  a  friend  who  gets  $7,000 
a  year  salary  but  pays  his  own  expenses.  Straight  com- 
mission or  a  lump  sum  for  salary  and  expenses,  there- 
fore, is  likely  to  prove  the  more  effective  method  of 

184 


DIRECT  SALESMEN 

compensation,  not  only  because  the  results  bulk  larger 
in  the  salesman's  eyes,  but  also  because  it  supplies  a  curb 
on  his  class  extravagance,  his  liking  for  the  best  hotels, 
the  fastest  trains,  taxicabs,  parlor  cars,  and  the  like. 

But  a  fancy  salary  will  not  always  obtain  a  salesman's 
best  efforts  unless  the  connection  between  these  efforts 
and  the  consequent  reward  is  visualized  for  him.  That 
is  one  reason  why  the  high-grade  specialty  man  nearly 
always  works  on  commission.  The  plan  suits  his  tem- 
perament. He  is  willing  to  take  the  risks  involved  in 
return  for  the  opportunity  of  independent  action.  And 
the  experience  of  manufacturers  would  seem  to  show 
that  no  other  method  of  payment  gives  such  dependable 
results  and  allows  such  varied  appeals  to  the  motives 
which  stimulate  sustained  effort. 

The  plan,  it  is  true,  has  its  drawbacks.  Salesmen 
working  on  commission  are  more  difBcult  to  control,  are 
inclined  to  resent  interference  with  their  personal  pro- 
grams of  work  and  play.  Their  time,  they  consider,  is 
their  own.  If  they  "let  dowTi  "  in  their  pursuit  of  orders, 
they  know  they  pay  for  the  lapse  in  lessened  income. 
That  the  house  also  loses  in  volume  of  sales  is  an  inci- 
dental thing.  So  vital  is  this  matter  of  control  that 
many  concerns  prefer  to  pay  salaries,  depending  on 
regular  advances  backed  up  by  daily  reports  and  other 
checks  to  insure  a  fair  level  of  industry  and  initiative. 
Bonus  systems  similar  in  principle  to  the  Taylor  method 
of  paying  factory  workers  have  also  been  developed  for 
the  encouragement  of  salaried  salesmen.  Whatever  his 
method  of  payment,  however,  no  manager  can  afford  to 
neglect  the  psychological  appeals  open  to  him  for  the 
incitement  of  his  men. 

Ambition  is  primary  among  the  motives  which  can 

185 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

be  enlisted.  The  salesman  on  commission,  with  a  guar- 
anteed territory,  is  virtually  in  business  for  himself. 
Of  every  order  closed  he  knows  he  will  retain  a  fixed  per- 
centage for  himself.  The  wise  manager  makes  the  most 
of  this  fact  in  urging  him  to  continued  activity  after  he 
has  reached  the  monthly  or  seasonal  volume  which  as 
a  rule  he  sets  for  himself.  It  is  those  plus  orders,  of 
course,  that  make  the  difference  between  ordinary 
profits  and  extra  dividends.  And  it  is  usually  the  sales- 
man's tendency  to  self-indulgence  or  some  similar  men- 
tal handicap  which  stands  between  the  management  and 
this  "  velvet." 

Salesmen,  as  a  rule,  have  individual  conceptions  of 
the  amount  of  money  they  should  earn  monthly  or 
yearly  or  during  a  trade  season.  One  is  a  $2,500  man. 
Another  puts  himself  in  the  $5,000  class.  A  third  fixes 
his  earning  power  at  $10,000.  And  when  they  have 
reached  the  self-appointed  mark  or  its  monthly  frac- 
tion, the  tendency  to  self-indulgence  is  ordinarily  so 
strong  that  they  slacken  their  efforts,  begin  to  go  to  ball 
games,  quit  their  territories  on  Friday  nights,  and  neg- 
lect out-of-the-way  or  doubtful  prospects. 

These  slumps  in  activity  ordinarily  come  at  the  end 
of  the  month  or  near  the  close  of  the  selling  period,  when 
the  desired  goal  is  within  easy  reach.  But  many  sales- 
men of  the  lower  grade  unconsciously  adopt  daily  sched- 
ules that  include  a  certain  amount  of  loafing  because 
they  have  learned  that  so  many  hours  of  "  hustling  " 
will  in  the  average  give  them  the  $25  or  $30  or  $40  a 
week  which  they  decide  on  as  their  standard  of  compen- 
sation, or,  if  they  are  on  salary,  the  volume  of  orders 
which  will  satisfy  their  employers. 

This  indeed  is  the  chief  problem  the  manager  of  sales- 

186 


DIRECT  SALESMEN 

men  faces  —  how  to  keep  each  salesman  in  his  territory 
and  at  work  after  he  has  secured  the  volume  of  orders 
which  he  has  set  for  himself. 

A  manufacturer  of  my  acquaintance  has  tried  again 
and  again  to  get  added  endeavor  by  added  payment. 
Individuals  have  here  and  there  responded,  but  as  a 
group  the  effort  failed.  Originally  he  paid  straight 
commissions.  Reducing  these  commissions  in  certain 
fertile  territories,  he  found  that  his  salesmen  continued 
to  make  about  the  same  income  as  before.  Apparently 
their  margin  of  leisure  was  large  enough  to  allow  con- 
siderable increase  in  activity  without  making  undue 
demands  on  their  time  and  energy. 

But  high  levels  in  sales  are  not  reached  and  main- 
tained by  cutting  commissions,  any  more  than  maxi- 
mum production  is  attained  in  the  long  run  by  lowering 
the  factory  piece  rates.  So  the  manufacturer  went  at 
the  thing  from  the  other  angle.  To  hold  his  men  and 
get  the  best  they  had  he  would  enable  them  to  make 
more  money.  So  he  increased  commissions;  but  the 
increase  did  not  bring  the  results  he  expected.  Instead, 
the  number  and  volume  of  orders  went  down  —  an 
outcome  that  is  difficult  to  understand  or  account  for 
unless  you  consider  how  strongly  the  inclination  to 
self-indulgence  operates  when  the  accustomed  standard 
of  life  has  been  attained. 

Nor  was  this  experience  out  of  the  common;  it  can 
be  matched  by  almost  any  business  which  pays  its 
salesmen  on  a  percentage  basis.  For  years  the  "  in- 
side "  slogan  of  the  organization  which  probably  has 
developed  more  high-grade  salesmen  than  any  other 
company  in  America  has  been:  '*  Time  not  spent  in  the 
presence  of  prospective  purchasers  is  time  lost."    And 

187 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

I  once  heard  a  great  sales  manager,  now  many  times  a 
millionaire,  put  all  the  emphasis  of  an  important  sales 
convention  address  on  this  same  point. 

*'  When  I  was  an  agent  myself,"  he  said,  "  I  started 
each  month  with  the  thought  that  I  was  in  debt  until  I 
had  earned  commissions  enough  to  meet  my  office,  home, 
and  traveling  expenses.  I  couldn't  rest  until  I  was  even 
with  the  board.  Sometimes  it  took  me  ten  working  days, 
sometimes  three  weeks  or  more  to  get  square.  But  when 
I  did  get  square,  I  simply  could  not  quit  because  I 
realized  that  I  was  just  beginning  to  work  for  myself. 
In  every  dollar  I  made  beyond  that  point  one  hundred 
cents  belonged  to  me.  And  what  a  fool  I  would  have 
been  to  waste  one  hour  loafing  or  amusing  myself,  when 
I  had  slaved  the  best  part  of  the  month  to  pay  for  this 
opportunity  to  work  for  myself!  " 

That  in  substance  was  the  message  of  a  $50,000  sales 
manager  to  two  hundred  agents,  no  one  of  whom  could 
retain  his  territory  and  earn  less  than  five  or  six  thou- 
sand dollars  a  year.  I  quote  it  simply  to  show  that  sales- 
men of  all  grades  have  "  the  defects  of  their  qualities  " 
and  that  the  unending  problem  in  managing  them  is  to 
find  and  utilize  the  motives  which  will  stimulate  them 
to  do  their  best.  There  is  even  the  danger,  as  suggested 
above,  that  their  compensation  can  be  made  so  liberal 
that  it  will  defeat  its  purpose. 

Personal  pride  and  social  emulation  are  motives  gen- 
erally appealed  to  in  this  vitalizing  of  sales  effort.  By 
substituting  for  the  individual  salesman's  conception  of 
what  his  territory  should  produce  a  sales  quota  propor- 
tionate to  its  population  or  the  number  of  live  prospects 
it  contains,  a  sound  basis  is  established  for  comparing 
the  personal  records  of  all  members  of  the  field  force. 

188 


DIRECT  SALESMEN 

Then  by  means  of  prize  contests  open  to  all  on  these 
equalized  terms,  the  instinct  of  competition  and  the 
desire  of  leadership  are  aroused  in  the  interest  of  indi- 
vidual efficiency.  The  prize  itself  is  the  least  of  the 
incentives.  In  many  cases  it  is  no  more  than  the  print- 
ing of  the  winners'  portraits  and  the  announcement  of 
their  records  in  the  house  organ  or  in  a  circular  letter. 
Even  when  it  takes  the  form  of  money  or  some  article 
of  personal  equipment,  its  chief  value  is  as  a  symbol  of 
the  distinction  attained. 

The  sales  contest  is  a  thing  so  familiar  that  no  analy- 
sis of  its  technique  or  effects  is  needed  here.  The  most 
successful  competitions  have  been  those  in  which  the 
struggle  was  visualized  as  a  game  or  sport,  like  a  hun- 
dred-mile motor  race,  a  baseball  or  football  game,  a 
flying  machine  race,  or  any  other  form  of  contest  that 
the  season  or  the  current  news  suggests  as  certain  to 
enlist  the  interest  of  the  field  force. 

Frequently  this  individual  competition  is  varied  by 
appeals  to  organization  spirit.  District  is  marshaled 
against  district,  city  territories  against  country  terri- 
tories, the  East  against  the  West,  and  so  on.  In  one  con- 
cern, at  least,  the  rivalry  has  been  carried  across  inter- 
national boundary  lines.  Before  the  present  European 
conflict  began  the  big  biennial  competition  was  a  three- 
months'  "  war  "  between  the  American  and  the  foreign 
sales  forces.  Even  here  individual  achievement  was 
the  burden  of  the  "news  from  the  front";  the  skill  and 
.courage  of  this  or  that  agent  or  salesman  in  landing 
large  orders  was  acclaimed. 

Coincident  with  these  monthly  and  quarterly  team 
contests  an  individual  competition  was  carried  on 
against   a   special   yearly   quota   averaging   forty   per 

189 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

cent  above  the  regular  quota.  This  contest  was  primar- 
ily against  a  monthly  "  bogy  "  of  one  hundred  points;  as 
soon  as  a  man  secures  twelve  of  these,  or  orders  total- 
ing twelve  hundred  points,  he  takes  his  place  among  the 
stars  of  the  "  Hundred  Point  Club."  The  instinct  of 
personal  emulation  was  further  enlisted  by  awarding  the 
presidency  and  the  lesser  offices  in  the  club  to  the  first 
winners  of  the  coveted  title  of  "  Hundred  Pointer." 
The  material  "  Hundred  Point  "  prize  was  a  trip,  free  of 
all  expense,  to  the  annual  sales  convention  at  the  factory. 

The  average  manager  has  to  determine  whether  con- 
ditions in  his  organization  make  it  sound  policy  to  carry 
on  such  sales  contests.  It  has  been  argued  that  sales- 
men soon  tire  of  them  and  refuse  to  respond  to  them. 
As  a  matter  of  fact,  they  have  been  conducted  month 
after  month  and  year  after  year  by  certain  sales  organi- 
zations; success  seems  to  depend  on  the  character  of  the 
contest  and  the  vitality  and  tact  of  the  management 
rather  than  on  novelty  to  the  sales  force.  It  must  be 
remembered,  however,  that  not  a  few  houses  of  high 
standing  object  to  the  principle  of  pitting  employees 
against  one  another;  while  others  find  it  difficult  to 
standardize  conditions  so  that  fair  quotas  can  be  es- 
tablished. 

In  fixing  quotas  it  must  be  borne  in  mind  that  some 
salesmen  are  more  militant  than  others,  and  that  while 
you  are  directing  them  in  groups  you  must  also  take 
their  individual  characteristics  into  consideration.  The 
quota  which  will  stir  the  fighting  qualities  of  one  man 
to  supreme  effort  will  merely  discourage  another;  and 
the  figure  which  will  be  quite  easy  to  secure  in  March 
or  October  may  be  entirely  beyond  reach  in  July  or 
January.   The  most  effective  quota,  therefore,  is  likely 

190 


DIRECT  SALESMEN 

to  be  a  compromise,  a  little  higher  than  the  average  for 
normal  months,  with  a  margin  of  increase  in  "rush" 
periods  and  particularly  favorable  seasons. 

\Miether  it  should  be  a  standard  based  on  population, 
or  the  number  of  rated  prospects,  or  a  more  flexible 
quantity  based  perhaps  on  past  performances  of  each 
salesman,  would  depend  on  the  number  of  men  involved, 
their  relations  with  the  house,  and  the  advantages  of 
individual  arrangements  and  individual  treatment.  Of 
the  wisdom  of  a  carefully  adjusted  quota  there  can 
hardly  be  a  question,  no  matter  what  method  of  pay- 
ment is  in  use.  For  one  thing,  it  supplies  a  standard 
of  industry  and  ability  for  each  salesman,  it  fixes  a  def- 
inite volume  of  sales  for  his  territory  instead  of  de- 
pending on  his  hazy  personal  notion  of  what  he  ought 
to  earn.  And  again,  it  gives  a  more  accurate  statistical 
basis  for  the  fixing  of  salaries  and  commissions  and  for 
the  comparison  of  individual  records. 

Mention  has  been  made  of  a  bonus  system  of  pay- 
ment for  salesmen  adapted  from  the  Taylor  and  Gantt 
systems  described  in  Chapter  VI  of  this  book.  These 
have  taken  varying  forms,  from  the  primitive  salary- 
and-commission  method  to  more  scientific  plans.  The 
fundamental  principle  in  all  is  recognition  of  the  excess 
profit  in  sales  made  over  and  above  the  ordinary  volume 
of  the  industry.  On  his  quota  of  this  ordinary  volume 
the  salesman  receives  the  usual  commission  or  salary; 
on  all  sales  above  this  quota  he  is  paid  at  a  much 
higher  rate. 

Certain  companies  have  gone  further,  working  out  for 
their  salesmen  a  close  parallel  of  the  Taylor  differential 
piece  rate,  with  marked  increases  in  commissions  as  the 
bonus  standard  is  reached  and  passed  and  corresponding 

191 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

lowering  of  the  rate  when  the  salesman  falls  short.  Here 
daily  quotas  and  bonuses  keep  the  advantages  of  appli- 
cation constantly  before  the  individual.  But  such  an 
intensive  use  of  the  motives  of  utility  and  money  gain 
is  practicable  only  in  lines  where  the  salesman  has  a 
number  of  regular  customers  or  definite  prospects  to 
see  every  day  and  where  the  demand  for  the  product  is 
continuing  and  susceptible  of  increase. 

Fearing  over-emphasis  upon  these  group  methods  of 
control,  payment,  and  stimulation,  there  is  another 
school  of  management  which  puts  its  faith  in  individual 
analysis  of  the  salesman's  character  and  abilities  first, 
followed  by  individual  training  and  placing  in  the  ter- 
ritory to  which  each  man  seems  best  adapted,  and  in- 
dividual managing  when  the  latter  has  taken  hold. 
Broadly  speaking,  this  is  the  method  of  the  successful 
old-school  manager,  who  frequently  is  an  uncommon 
judge  of  men  and  has  sufficient  force  and  personality 
to  command  the  loyalty  and  enthusiasm  of  his  sub- 
ordinates. 

In  such  cases,  however,  the  securing  and  holding  of 
salesmen  is  largely  a  process  of  "  trial  by  error  ";  if  the 
man  fails  to  "  make  good,"  he  is  dropped  and  another 
candidate  takes  his  place.  In  a  small  organization,  this 
is  a  practicable  method,  particularly  when  the  direction 
of  sales  is  in  the  hands  of  the  man  who  built  the  busi- 
ness. In  a  large  sales  force,  it  might  easily  lead  to  dis- 
organization, loss  of  sales,  heavy  expense,  and  sacrifice 
of  prestige  and  good  will,  unless  it  were  backed  up  by  an 
efficient  system  for  taking  care  of  records  and  all  the 
routine  activities  of  selling.  Supplemented  in  this 
fashion,  individual  hiring,  training,  and  managing  of 
salesmen,  without  attempting  any  group  incentive,  is  a 

192 


DIRECT  SALESMEN 

practical  ideal  which  has  been  realized  with  rather  large 
forces  by  sales  directors  who  concentrate  on  this  one 
function  and  leave  routine  to  assistants.  In  such  an 
organization  records  and  results  are  considered  only  as 
they  demonstrate  individual  selling  efficiency. 

Whether  he  shall  stress  group  or  individual  manage- 
ment of  his  salesmen,  therefore,  is  a  question  which 
each  executive  must  settle  for  himself.  He  will  first 
eliminate  the  personal  equation  so  far  as  is  possible, 
then  he  will  break  the  main  problem  up  into  its  con- 
stituent problems,  analyzing  these  and  assembling  the 
factors  which  influence  them,  and  he  will  adopt  a  point 
of  view  independent  of  tradition,  trade  customs,  and 
even  personal  experience.  The  decisive  factor  may  be 
the  character  of  the  salesmen  available  or  actually  at 
work,  the  trade  requirements  which  must  be  satisfied 
in  marketing  his  product,  the  quality,  price,  simplicity, 
or  complexity  of  that  product,  or  any  one  of  a  score  of 
conditions  or  combinations  of  conditions  which  it  is 
imperative  to  consider. 

Whatever  his  choice,  he  will  face  certain  stock  prob- 
lems which  every  sales  manager  faces.  These  problems 
arise  from  the  ambition  of  salesmen  to  make  records, 
from  their  readiness  in  particular  cases  to  rely  on  their 
own  judgment  rather  than  to  observe  the  house  policy, 
from  the  lack  of  balance  which  often  goes  with  the 
valuable  quality  of  enthusiasm,  from  the  tendency  to 
oversell  or  unconsciously  misrepresent  the  product  to 
customers,  from  the  narrow  view  of  sales  possibilities 
which  holds  to  accustomed  paths  in  the  search  for 
prospects,  from  the  itch  for  change  which  makes  the 
investment  value  of  a  new  salesman  an  uncertain  quan- 
tity, from  the  lack  of  self-discipline  which  crops  out  in 

193 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

careless  expense  accounts  and  in  the  slighting  of  tasks 
which  have  no  immediate  influence  on  sales  or  com- 
pensation. 

It  is  problems  like  these  that  put  a  premium  on  train- 
ing courses  and  carefully  organized  systems  of  super- 
vision, which  leave  nothing  to  the  salesman's  initiative 
except  the  actual  face-to-face  dealing  with  customers. 
So  much  has  been  written  about  the  schooling  of  sales- 
men, and  the  methods  employed  are  so  familiar,  that 
they  are  referred  to  here  only  to  emphasize  the  need  of 
making  this  training  as  comprehensive  as  it  can  be  and 
of  continuing  it  as  long  as  the  salesman  represents  the 
company. 

To  acquaint  him  with  all  your  ideas  about  your  goods 
is  naturally  the  first  purpose,  since  it  is  his  function  to 
transmit  these  ideas  to  consumers  or  to  the  middlemen 
who  will  aid  in  distributing  your  product.  This  might 
be  a  mere  memory  exercise  for  him,  and  for  you  the 
gathering  and  compiling  of  a  manual  of  selling  points. 
Only  this  is  not  enough.  To  reduce  a  mass  of  informa- 
tion to  an  orderly  store  of  living  knowledge,  each  idea 
instantly  accessible  when  occasion  arises  for  its  use, 
requires  on  your  part  careful  analysis  and  logical  ar- 
rangement of  the  material,  and  intelligent  study  and 
practice  on  his. 

Goods  can  be  sold  and  are  sold  by  the  million  dollars' 
worth  without  either.  It  is  merely  a  question  of  your 
taking  the  pains  to  analyze  your  product  and  to  prepare 
beforehand  an  approach  and  a  series  of  selling  points 
which  are  convincing,  or  else  allowing  your  salesman  to 
make  the  same  analysis  in  the  presence  of  a  dozen  or  a 
hundred  or  perhaps  a  thousand  prospects  before  he 
learns  all  the  possible  contacts  and  reactions  and  is  able 

194 


DIRECT  SALESMEN 

to  perfect  his  exposition.  If  you  leave  it  to  his  initia- 
tive, he  may  be  years  discovering  and  putting  to  use 
the  selling  points  which  a  month  or  two  of  schooling  at 
the  factory  or  in  selected  training  ground  would  have 
given  him.  And  every  business  man  who  has  bought 
merchandise  or  equipment  for  any  length  of  time  has 
met  salesman  after  salesman  whose  goods  had  to  sell 
themselves  in  spite  of  an  awkward  approach  and  blun- 
dering demonstration. 

I  am  not  advocating  the  crude,  ready-made  canvass 
and  selling  talk  which  is  as  ineffective  as  it  is  common. 
But  experience  both  as  seller  and  buyer  and  some  ac- 
quaintance with  the  best  current  sales  practice  have 
persuaded  me  that  every  step  in  the  selling  process  can 
be  standardized,  from  analysis  of  the  product  and  its 
market  to  the  closing  argument  which  clinches  the 
order. 

All  that  was  said  in  a  previous  chapter  about  the  de- 
velopment of  laboratory  standards  as  applied  to  the 
materials  of  demand  creation  holds  true  for  face-to-face 
selling  as  well  as  for  advertising.  Not  only  can  the 
most  effective  arguments  be  determined,  but  also  the 
most  effective  order  in  which  they  can  be  brought  to 
bear  upon  the  prospective  customer.  There  may  be 
forty  cogent  reasons,  for  example,  why  the  detail  sales 
strip  in  a  cash  register  is  a  record  of  value  to  various 
merchants,  yet  only  four  of  these  may  be  of  direct  in- 
terest to  a  certain  storekeeper.  The  salesman's  task  is 
to  discern  the  special  conditions  which  govern  in  the 
case  and  to  put  forward  the  selected  arguments  of 
greatest  weight. 

It  is  obvious  that  a  standard  selling  talk  could  not  be 
framed  to  fit  equally  well  all  the  store  situations  and 

195 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

personal  idiosyncrasies  which  an  equipment  salesman 
will  encounter.  But  if  he  has  a  logical  method  of  ap- 
proaching his  prospect  and  uncovering  the  latter's  busi- 
ness needs  and  mental  attitude,  if  he  can  draw  from  a 
store  of  tested  selling  points  the  illustrations  and  argu- 
ments which  fit  the  case  most  exactly,  and  if  he  knows 
the  proper  sequence  in  which  these  should  be  intro- 
duced to  bring  his  prospect  to  the  point  of  buying, 
his  chances  of  landing  the  order  are  decidedly  and 
measurably  increased. 

Between  such  a  skilled  approach  and  demonstration, 
with  its  definite  plan  and  its  wide  latitude  in  the  use  of 
selling  points,  and  the  parrot-like  recital  of  standard 
sales  talk  there  is  all  the  difference  in  the  world.  Part 
of  this  difference  lies  in  the  faulty  analysis  and  scanty 
materials  on  which  the  latter  is  built;  a  large  part,  how- 
ever, lies  in  the  difference  in  the  training  given  the  sales- 
men —  a  careful  and  persistent  instruction,  with  the 
development  of  mental  poise  and  initiative  on  the  one 
hand  and  the  hasty  cramming  of  a  sales  formula  on 
the  other. 

Not  every  business  needs  or  is  able  to  develop  train- 
ing courses  for  salesmen  like  those  which  the  large  spe- 
cialty companies  maintain.  Products  may  be  so  simple 
or  the  items  in  the  line  manufacture  so  few  that  an 
elaborate  analysis  would  cost  more  than  it  would  make. 
Customers  and  prospects  may  be  confined  to  a  single 
trade  and  be  so  nearly  of  the  same  type  that  a  salesman 
of  moderate  resource  can  deal  with  them  satisfactorily. 
As  the  product  becomes  complex  or  the  line  longer  or  an 
expanding  market  takes  in  prospects  engaged  in  many 
different  kinds  of  business,  the  value  of  analysis,  classi- 
fication, and  organization  of  your  materials  of  demand 

196 


DIRECT  SALESMEN 

creation  increases  rapidly  and  the  necessity  of  a  defi- 
nite method  of  instruction  grows. 

Even  where  a  formal  school  for  salesmen  is  out  of  the 
question,  other  means  are  successfully  employed  for 
their  training.  The  commonest  and  the  most  effective 
in  small  organizations  is  personal  attention  on  the  part 
of  the  sales  manager,  both  in  the  "  breaking  in  "  of  new 
salesmen  and  in  the  aid  and  supervision  given  to  sea- 
soned members  of  the  force.  The  house  organ  and  the 
sales  convention  are  also  widely  used.  The  former 
ranges  from  a  weekly  or  monthly  mimeographed  record 
of  individual  sales,  with  a  "  ginger  talk  "  and  new  selling 
points  added,  to  admirably  edited  and  printed  weekly 
or  monthly'  magazines,  full  of  new  facts  about  the  prod- 
ucts, personal  mention  of  salesmen  and  their  achieve- 
ments, and  inspirational  messages  and  editorials.  When 
contests  of  the  spectacular  sort  are  on,  the  house  organ 
frequently  becomes  a  daily  paper,  with  every  appeal  to 
the  social  emulation,  ambition,  and  sportmanship  of 
the  individual  salesman  intensified. 

Every  possible  change,  too,  is  rung  on  the  sales  con- 
vention. There  may  be  daily  and  weekly  meetings  of 
city  salesmen,  monthly  gatherings  of  district  forces, 
annual  visits  to  the  factory  for  three  days  or  a  week  of 
instruction,  with  interchange  of  ideas,  good  fellowship, 
and  judicious  cultivation  of  organization  spirit  and  per- 
sonal enthusiasm. 

To  do  more  than  indicate  the  broad  problems  and 
policies  involved  in  the  hiring,  training,  and  manage- 
ment of  salesmen  would  be  impossible  in  a  single  chap- 
ter. If  I  have  seemed  to  slight  the  problems  of  hiring, 
it  is  because  there  is  less  of  agreement  among  business 
men  and  psychologists  as  to  many  of  the  specific  qual- 

197 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

ities  which  make  a  salesman  and  as  to  the  tests  which 
reveal  these  qualities  than  in  almost  any  other  depart- 
ment of  business. 

Certain  qualities  which  are  recognized  as  fundamental 
have  been  suggested  earlier  in  this  chapter.  But  even 
here  dependable  scientific  tests  to  determine  whether 
or  not  a  salesman  possesses  them  have  not  been  devel- 
oped. Promising  experiments  and  investigations  are 
under  way  by  the  psychological  departments  of  several 
universities  in  cooperation  with  industrial  concerns. 
The  results  thus  far  are  meager,  however,  and  the  aver- 
age business  man  in  hiring  a  new  salesman  must  still 
depend  on  the  old  process  of  a  personal  "  sizing  up," 
checked  up  by  the  record  of  past  performances  and  ref- 
erences as  to  the  subtler  qualities  of  character  which 
limit  or  enlarge  the  salesman's  usefulness  in  demand 
creation. 

No  methods  of  hiring,  training,  paying,  and  direct- 
ing, however,  can  result  in  satisfactory  relations  with 
salesmen  unless  backed  by  a  certain  human  friendli- 
ness and  understanding.  If  this  quality  is  present,  the 
salesman  inevitably  senses  it;  nor  can  any  amount  of 
simulation  long  conceal  its  absence.  Analyzed,  it  may 
be  found  largely  a  keen  perception  of  the  salesman's 
pleasure  in  effective  functioning,  and  of  the  house's  in- 
terest in  supplying  him  the  most  favorable  conditions. 
But  it  must  include  a  generous  measure  of  simple  good 
will.  Without  this,  true  loyalty  and  cooperation  are 
not  to  be  expected. 


198 


CHAPTER  XIII 
AGENCIES  OF  DEMAND  CREATION  —  ADVERTISING 

A  DVERTISING  is  the  communication  of  ideas  about 
-^*-  the  goods  to  possible  purchasers  by  means  of  writ- 
ten or  printed  symbols.  As  in  the  transmission  of  like 
ideas  through  middlemen  and  through  direct  salesmen, 
its  purpose  is  to  create  a  demand  for  a  product  or  to 
divert  a  demand  already  existing.  It  has  been  devel- 
oped not  solely  to  take  the  place  of  the  middleman  or 
salesman  in  demand  creation  but  as  a  means  of  doing 
quickly,  cheaply,  and  efifectively  much  of  the  work 
these  other  agencies  have  done  in  the  past  and  much 
which  neither  could  profitably  undertake  at  present. 

Like  them,  it  has  its  limitations  and  its  spheres  of 
special  utility  where  it  satisfies  all  selling  requirements. 
Apart  from  these  specific  fields  —  mail-order  selling,  for 
example  —  the  manager's  problem  is  to  determine  what 
part  of  his  work  of  demand  creation  can  be  done  more 
cheaply  or  more  efficiently  by  advertising  than  by  his 
sales  force  and  what  kind  or  class  of  advertising  is  best 
adapted  to  perform  each  of  these  tasks.  There  is  the 
further  problem  of  coordinating  the  different  elements 
in  his  selling  plan,  in  order  to  eliminate  the  duplication 
of  effort  which  pyramids  distribution  costs  to-day.  But 
that  is  matter  for  a  succeeding  chapter  on  organization. 
Two  broad  classifications  of  advertising  are  recog- 
nized —  general  and  direct.  The  first  aims  to  find  new 
prospects  either  addressing  the  broader  public  through 

199 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

magazines,  newspapers,  painted  or  electric  signs,  posters 
or  street-car  cards,  or  appealing  to  a  special  social 
stratum  or  a  professional  or  business  group  through 
the  class  periodical  or  trade  journal. 

The  second  seeks  to  turn  known  prospects  into  pur- 
chasers and  to  cultivate  good  will  and  stimulate  in- 
creased buying  among  regular  and  occasional  customers. 
Various  mediums  are  used,  either  independently  or 
in  combination  —  personal  letters,  booklets,  circulars, 
and  mailing  cards,  house  organs,  catalogs,  premiums, 
and  novelties.  Direct  advertising  is  intensive  advertis- 
ing in  that  it  is  aimed  at  individuals  selected  from  the 
mass,  whose  needs,  tastes,  and  inclination  to  buy  have 
been  fairly  well  established  and  each  of  whom  has  a  local 
habitation  and  a  place  on  the  mailing  list. 

For  all  practical  purposes,  both  direct  and  general 
advertising  can  be  treated  as  one  phase  of  sale  by  de- 
scription. All  advertising,  indeed,  is  a  logical  outgrowth 
of  sale  by  description.  So  long  as  prevailing  commercial 
ethics  made  sale  in  bulk  the  only  practical  method  of 
distribution,  the  middleman  was  indispensable.  As 
business  morals  bettered  and  manufacturing  methods 
improved  so  that  standardization  of  products  was  pos- 
sible, sale  by  sample  appeared.  The  producer  found  that 
he  could  send  his  own  salesman  to  the  prospective  pur- 
chaser instead  of  depending  solely  upon  the  selling 
efforts  of  a  middleman  to  obtain  an  outlet. 

When  sale  by  description  appeared,  with  a  still  higher 
code  of  conduct  and  a  higher  level  of  general  intelli- 
gence, a  third  selling  agency  took  form  in  advertising. 
Its  development  as  an  important  tool  of  business  falls 
well  within  the  last  fifty  years,  with  its  significance 
greatly  increased  toward  the  end  of  the  period.   In  ad- 

200 


ADVERTISING 

vertising,  as  in  selling  through  salesmen,  it  is  the  com- 
munication of  ideas  about  the  goods  to  the  prospective 
purchaser  that  creates  demand.  When  the  purchaser 
insisted  on  seeing  and  testing  the  actual  goods  before 
purchasing,  sale  by  advertising  was  impracticable. 
This  remained  true,  on  the  whole,  even  after  sale  by 
sample  became  common. 

Increasing  general  intelligence,  however,  has  made  it 
possible  to  picture  and  describe  merchandise  so  clearly 
that  the  prospective  purchaser  is  able  to  buy  what  he 
wants  and  to  know  what  he  will  receive  without  having 
a  sample  for  examination.  Confidence,  of  course,  is 
the  fundamental  thing  in  such  buying.  For  purely  self- 
ish reasons,  therefore,  to  say  nothing  of  the  current 
code  of  business  ethics,  the  merchant  can  usually  be 
depended  upon  to  supply  the  goods  described.  Under 
these  circumstances,  advertising  becomes  in  many 
businesses  the  most  economical  agency  of  demand  crea- 
tion. Even  where  the  actual  sale  is  made  by  a  salesman 
from  a  sample,  advertising  is  used  beforehand  as  an 
agency  to  stimulate  the  desire  which  the  salesman  by 
his  selling  talk  and  demonstration  turns  into  expressed 
demand.  Sale  on  approval  makes  it  possible  also  to 
create  effective  demand  through  advertising  even  when 
the  prospect  insists  on  seeing  the  goods  before  conclud- 
ing his  purchase. 

It  follows  that  advertising  may  be  employed  either  as 
a  substitute  for  middlemen  and  salesmen  or  as  an  aux- 
iliary force  to  aid  them  in  their  exercise  of  the  selling 
function.  It  tends  to  displace  these  other  agencies,  in 
whole  or  in  part,  whenever  it  is  a  less  expensive  or  more 
direct  means  of  communicating  ideas  to  the  consumer. 
It  cannot  be  dismissed  as  mere  "  puffing,"  because  its 

201 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

substantial  usefulness  in  our  present  scheme  of  distribu- 
tion has  been  demonstrated. 

That  there  are  wastes  and  abuses  in  its  employment 
may  be  frankly  admitted.  It  is  a  new  economic  force, 
as  yet  only  partly  understood,  which  has  brought  change 
and  readjustment  in  all  our  machinery  of  distribution 
and  is  itself  undergoing  constant  modification  and  ad- 
justment. It  has  been  used  extravagantly  in  not  a  few 
instances  to  exploit  commodities  having  a  wide  margin 
of  profit.  In  others  it  has  been  expected  to  prove  a 
panacea  for  weaknesses  in  departments  remotely  related 
to  selling.  And  in  a  great  many  cases  the  failure  of  in- 
dividual campaigns  has  been  charged  up  against  adver- 
tising as  a  marketing  force  when  the  blame  was  due  to 
ignorance  or  neglect  of  some  important  factor  or  ele- 
ment on  the  part  of  the  advertiser. 

Against  some  advertising  campaigns  the  indictment 
has  been  brought  that  they  were  simply  "weapons  of 
destructive  competition,"  ^  serving  no  useful  purpose. 
Professor  Taussig,  observing  that  "mere  effrontery  in 
puffing  your  wares  is  an  important  factor  in  modern 
trade,"  offers  this  illustration  of  such  action: 

"Among  articles  equally  good,  that  which  is  syste- 
matically paraded  is  likely  to  be  most  readily  sold. 
People  are  led  to  buy  Smith's  wares  rather  than  Jones's. 
One  might  suppose  that  if  Smith's  wares  were  equally 
good,  and  were  sold  at  a  lower  price  (made  possible  by 
eliminating  the  advertising  expense)  he  would  hold  his 
own  in  spite  of  Jones's  preposterous  puffing.  But  in 
fact,  Jones's  wares  are  preferred;  some  vague  impression 
of  superiority  is  produced  by  the  incessant  boasting. 

^  F.  W.  Taussig,  "  Principles  of  Economics,"  Vol.  II,  p.  428. 
202 


ADVERTISING 

Plentiful  cash  is  the  sine  qua  non  of  an  effective  adver- 
tising campaign." 

But  from  the  standpoint  of  the  business  man,  Jones's 
advertising,  if  it  be  typical  of  most  campaigns,  does  not 
accomplish  its  full  and  proper  work  if  it  simply  diverts 
demand  which  would  otherwise  go  to  Smith's  product 
or  be  divided  with  the  latter.  If  the  advertising  has 
convincing  selling  quality,  it  will,  with  the  great  major- 
ity of  products,  create  demand  which  did  not  exist  be- 
fore and  will  thus  widen  the  market  for  all  makes  of 
the  article  it  describes.  Numerous  instances  could  be 
quoted  in  support  of  this  statement,  covering  a  wide 
range  of  human  wants  and  appetites,  from  breakfast 
foods  to  farming  implements. 

I  feel  sure,  too,  that  something  more  than  "a  vague 
impression  of  superiority  "  is  produced  by  any  adver- 
tising campaign  worthy  of  the  name.  With  many 
low-priced  articles,  frequently  bought  and  quickly  con- 
sumed, repeated  statement  of  their  merits  may  be 
enough  to  influence  the  first  and  succeeding  purchases. 
In  any  case  involving  greater  expenditure,  however,  the 
impression  built  up  by  the  advertising  would  have  to  be 
positive  and  convincing  to  overcome  the  prospects' 
natural  inertia  and  disinclination  to  change  his  buying 
habits.  With  utility  values  equal,  too,  there  is  the 
question  of  psychic  value.  Because  advertising  has 
given  Jones's  product  a  vogue,  there  is  to  the  purchaser 
a  distinct  element  of  satisfaction  in  the  certainty  that 
it  will  be  recognized  as  a  standard  product  needing  no 
apology  or  explanation. 

From  the  viewpoint  of  economy  alone  advertising 
has  made  possible  the  marketing  of  thousands  of  com- 
modities on  a  national  scale,  with  the  consequent  sav- 

203 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

ings  that  always  come  from  large-scale  production  and 
distribution  efficiently  carried  out  and  that  are  certain 
to  be  reflected  in  the  long  run  in  lower  prices  to  the 
consumer.  It  has  set  new  and  higher  standards  of 
quality,  utility,  and  value,  not  only  in  the  things  ad- 
vertised, but  in  nearly  everything  that  the  ordinary 
man  or  woman  uses  or  consumes  in  everyday  life.  By 
the  same  process  it  has  constantly  brought  these  new 
facilities  and  comforts  to  the  attention  of  those  who 
needed  them.  And  it  has  accomplished  all  this  by  the 
diversion  of  a  far  smaller  sum  of  human  energy  than 
any  other  knowai  method  of  demand  creation  would 
have  required  —  granting  that  any  other  method  would 
have  been  able  at  all  to  perform  the  same  service. 

It  is  an  accepted  truth  among  advertisers  that  the  cre- 
ation of  permanent  demand  for  any  commodity  or 
specialty  is  impossible,  no  matter  how  great  the  ex- 
penditure, unless  it  is  at  least  equal  in  value  to  any 
competing  product.  This  value  may  be  partly  psychic, 
in  the  sense  that  better  design  or  higher  finish  or  an 
attractive  or  dirt-proof  package  is  the  basis  of  the  spe- 
cial appeal  to  the  consumer.  But  there  must  also  be 
solid  value  to  satisfy  the  consumer's  need,  or  the  cam- 
paign exploiting  it  is  bound  ultimately  to  fail. 

The  marvelous  expansion  of  the  clothing  industry  in 
the  United  States  suggests  how  advertising  reacts  on 
the  product  and  effects  standardization  and  increase  in 
values  as  well  as  reduction  in  marketing  expense.  To 
begin  with,  we  have  the  testimony  of  the  largest  makers 
and  distributors  of  trade-marked  clothing,  who  spend 
in  some  cases  upwards  of  half  a  million  dollars  a  year  on 
publicity,  that  their  selling  cost  per  suit  is  less  now  than 
before  they  began  advertising.    Because  they  are  able 

204 


ADVERTISING 

to  manufacture  and  market  suits  by  the  hundred  thou- 
sand, they  have  been  able  not  only  to  reduce  their 
advertising  outlay  per  unit  sale,  but  also  to  effect  re- 
markable economies  in  buying,  manufacturing,  selling, 
and  the  handling  of  reserve  stocks. 

Differentiation  and  the  development  of  selling  points 
are  fundamentals  of  successful  advertising  and  hence 
influence  the  character  of  the  product  sold.  If  the 
first  analysis  of  the  product  does  not  bring  out  a  con- 
vincing array  of  selling  points,  the  pressure  on  designers 
and  production  men  to  supply  them  becomes  imperative. 
Merely  general  claims  may  at  times  close  orders  when 
backed  up  by  the  salesman's  skilled  presentation  and 
his  personality.  But  cold  type  and  pictures  demand 
the  presentation  of  specific  advantages  to  the  buyer. 
They  may  take  the  shape  of  reduced  factory  costs,  re- 
flected in  lower  prices,  of  added  utility,  beauty,  conven- 
ience, or  durability,  of  more  careful  handling,  packing, 
and  delivery,  of  more  intelligent  adaptation  to  the  in- 
dividual consumer's  needs  or  increased  service.  What- 
ever the  line  of  betterment  pursued,  almost  invariably 
the  consumer  profits.  Instead  of  creating  a  "vague 
impression  of  superiority,"  any  successful  advertising 
campaign  must  be  based  on  the  creation  of  substantial 
and  demonstrable  points  of  superiority  to  differentiate 
the  advertised  product  from  the  mass  of  competing 
articles. 

Granting  that  these  added  selling  features  are  some- 
times of  little  actual  and  permanent  value,  there  is  no 
question  in  my  mind  that  the  influence  of  advertising, 
particularly  in  recent  years,  has  been  increasingly  on 
the  side  of  betterment  and  heightened  utility  in  the 
products  advertised.    Anyone  whose  memory  is  long 

205 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

enough  to  recall  the  ready-made  medium  and  high- 
grade  clothing  of  twenty  years  ago  and  compare  its 
style,  fit,  comfort,  fabrics,  and  prices  with  the  same 
elements  in  the  clothing  retailed  to-day  has  a  good  meas- 
ure of  the  social  service  which  advertising  has  contrib- 
uted in  this  and  many  other  fields. 

Consumers  and  middlemen  have  been  educated  to 
discrimination  in  their  buying;  non-advertising  manu- 
facturers have  had  their  attention  concentrated  on  the 
qualities  advertised  and  on  the  internal  conditions  in 
their  own  businesses  which  might  be  standing  between 
themselves  and  like  advantages.  Certainly  the  quality 
of  non-advertised  lines,  sold  under  the  dealer's  label, 
has  been  greatly  affected  by  the  general  advertising  of 
the  great  houses  and  by  the  demand  of  consumers  for 
style,  fit,  and  materials  of  a  grade  appropriate  to  the 
prices  asked. 

The  remarkable  development  of  the  American  motor 
car  is  another  case  in  print.  Without  advertising  to  call 
the  attention  of  prospective  buyers  to  the  improvements 
and  new  features  of  their  cars,  thus  stimulating  demand 
for  the  new  models  and  creating  desire  for  possession  in 
non-owners,  current  standards  in  design,  construction, 
and  price  would  not  have  been  reached  for  many  years 
to  come.  European  experience  demonstrates  this  and 
European  prices  prove  again  that  advertising,  the  key 
to  sale  volume,  instead  of  increasing  the  cost  to  the  con- 
sumer, almost  always  reduces  the  prices  and  increases 
the  quality  or  utility  of  the  article  exploited.  Without 
exception,  it  reacts  on  manufacture,  since  the  pressure 
is  to  produce  an  article  which  can  be  more  effectively 
advertised,  whether  it  be  quality  or  price  that  is  the 
chosen  appeal  to  the  consumer. 

206 


ADVERTISING 

When  waste  does  occur  in  advertising,  it  may  gener- 
ally be  attributed  to  one  of  five  things:  positive  lack 
in  the  product  of  those  elements  of  quality  or  service 
which  appeal  to  the  consuming  public's  need  or  desire; 
ignorance  of  the  true  function  of  advertising  as  an  agent 
of  demand  creation  for  the  particular  product  in  hand; 
blundering  application  of  recognized  principles;  failure 
to  develop  laboratory  standards  for  the  testing  of  sell- 
ing materials  and  mediums;  or  neglect  to  utilize  and 
keep  in  operating  balance  the  other  essential  agencies 
of  distribution. 

It  need  hardly  be  said  that  if  the  goods  advertised  are 
not  adapted  to  satisfy  a  real  want,  the  advertising  can- 
not produce  results ;  attempting  to  sell  a  thing  for  which 
no  one  has  actual  or  potential  use  is  wasted  effort.  Even 
with  a  desirable  product,  the  medium  used  for  the  trans- 
mission of  ideas  about  it  may  not  be  the  one  reaching 
an  economic  or  social  group  in  which  are  many  individ- 
uals having  a  latent  need  for  the  commodity. 

The  most  serious  cause  of  inefficiency  usually  lies  in 
the  fact  that  the  ideas  about  the  goods  or  the  form  in 
which  they  are  communicated  are  not  adapted  to  secure 
the  reaction  desired.  Enough  has  been  said,  however, 
about  methods  of  measuring  the  value  of  advertising  to 
indicate  the  policies  whose  observance  will  correct  either 
of  these  conditions.  The  final  important  cause  of  waste 
in  advertising,  neglect  to  provide  for  adequate  physical 
distribution  and  thus  realize  maximum  results  from 
aroused  demand,  will  be  discussed  in  another  place. 
Here,  as  in  all  the  other  activities  of  distribution,  the 
manager  must  preserve  a  balance  between  the  time, 
area,  and  volume  factors  both  in  advertising  and  physi- 
cal distribution,  or  the  leakage  of  demand  will  destroy 

207 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

all  the  gain  which  should  come  from  the  most  effective 
campaign. 

I  believe  that  the  social  disadvantages  attributed  to 
advertising  do  not  in  the  main  exist,  but  that  consid- 
ered as  one  agency  of  selling  and  utilized  in  its  proper 
place,  advertising  is  a  modern  social  force  of  high  value. 
To  the  producer  the  advantages  possessed  by  advertis- 
ing over  other  agencies  in  demand  creation  fall  under 
three  heads. 

I.  Efficiency.  In  advertising  there  is  virtually  no 
limit  to  the  number  of  prospective  buyers  who  can  be 
addressed  simultaneously  either  through  one  medium 
or  through  many.  Intensive  cultivation  of  one  or  more 
selected  districts  is  equally  practicable.  In  both  cases 
quick  action  makes  immediate  results  possible,  whether 
the  object  is  sales  volume  or  the  defining  of  the  market 
in  its  broad  lines.  By  choosing  the  right  mediums  and 
adapting  the  appeal  to  the  class  addressed,  every  prom- 
ising social  and  economic  level  can  be  explored  and  those 
who  will  buy  your  product  for  consumption  or  resale 
can  be  discovered. 

Besides  this  selective  method  of  appealing  to  classes 
and  individuals,  a  balanced  campaign  has  cumulative 
force,  influencing  the  public  mind  as  well  as  individuals. 
The  psychological  effect  of  getting  everybody  talking 
about  the  goods  is  too  well  known  to  require  elabora- 
tion. Another  important  by-product  of  advertising  is 
the  stimulus  exerted  on  those  to  whom  it  is  not  directly 
addressed.  The  surest  road  to  the  interest  of  the  mid- 
dleman, for  instance,  is  a  convincing  campaign  aimed 
at  prospective  consumers. 

Where  the  ideas  about  the  goods  are  difficult  to  com- 
municate because  they  are  new  and  different,  or  where 

208 


ADVERTISING 

for  any  other  reason  *'  the  trade  "  cannot  be  depended 
upon  for  their  transmission,  advertising  offers  the  only 
available  means  of  rapid  and  accurate  transmission. 
A  further  special  utility  is  the  stabilizing  of  the  market 
for  a  product  by  inducing  the  ultimate  user  to  insist  on 
having  it  and  thus  limiting  the  dealer's  power  to  supply 
a  substitute. 

II.  Economy.  For  the  same  outlay  advertising  will 
establish  a  contact  with  twenty  or  a  hundred  prospec- 
tive purchasers  where  a  salesman  or  a  middleman  can 
call  on  only  one.  Granting  that  the  latter  contact  is 
usually  more  likely  to  show  immediate  results,  it  re- 
mains true  that  except  where  the  total  of  possible  pur- 
chasers is  small  or  where  they  are  concentrated  in  a 
small  area  the  work  of  finding  them  and  acquainting 
them  with  the  product  can  be  done  much  more  cheaply 
by  advertising. 

In  preparing  the  ground  for  the  salesman's  call,  in 
giving  variety  and  interest  to  the  follow-up  which  con- 
tinues the  education  of  the  consumer,  and  in  supple- 
menting the  salesman's  efforts  in  an  intensive  campaign, 
advertising  has  developed  an  exclusive  sphere  of  action 
by  securing  results  at  minimum  cost.  In  the  mail- 
order field,  of  course,  advertising  has  demonstrated  its 
ability  to  market  the  most  diversified  lines  both  eco- 
nomically and  efficiently. 

III.  Controls.  The  materials  of  demand  creation  can 
be  presented  in  the  exact  order  and  in  the  particular 
form  which  tests  have  proved  to  be  the  most  effective. 
The  producer's  ideas  about  his  goods  thus  become 
fixed  quantities  for  the  consumer  and  the  middleman. 
There  is  no  chance  of  a  salesman's  failing  to  transmit 
them  fully  and  convincingly,  no  danger  of  his  misrepre- 

S09 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

senting  the  product  and  the  policies  behind  it,  or  of 
substituting  for  sound  and  honest  salesmanship  the 
specious  pull  of  personality,  with  its  bad  after  effects. 
Advertising  writes  a  sales  platform  for  the  house  to 
which  not  only  the  selling  force  but  also  the  production 
and  service  departments  must  conform. 

This  permanence  of  the  written  or  printed  word  and 
symbol  gives  the  reader  confidence  in  the  claims  put 
forward  for  the  goods,  particularly  when  the  medium 
of  transmission  is  one  to  which  he  looks  for  necessary  or 
valued  information.  All  his  training,  from  school  days 
on,  has  accustomed  him  to  receive  important  ideas 
through  the  eye.  The  impression  made  by  advertising, 
therefore,  is  clearer  and  more  lasting;  any  complex 
statement,  put  in  written  or  printed  form,  is  more  easily 
analyzed  and  understood.  Psychologists  are  agreed  on 
this  point;  and  salesmen  by  the  thousand  apply  the 
principle  every  day  when  they  use  the  advertising  is- 
sued by  their  concerns  to  concentrate  the  attention  of 
customers  on  some  vital  point  or  to  reinforce  word-of- 
mouth  statements  about  their  products  and  policies. 

The  character  of  the  demand  created  is  an  important 
factor  in  determining  advertising  policy.  This  may  be 
either  one  of  three  general  kinds:  (1)  expressed  de- 
mand, (2)  unexpressed  conscious  demand,  and  (3)  sub- 
conscious demand. 

To  illustrate  the  distinction  between  them,  suppose 
that  a  specialized  product  distributed  through  retailers 
is  advertised  in  one  or  several  periodicals  of  large  cir- 
culation. In  response  to  this  publicity,  30,000  persons 
go  to  convenient  stores  and  ask  for  it,  60,000  make  a 
mental  note  of  its  name  and  qualities  and  decide  to  buy 
it  when  next  they  need  such  an  article,  and  100,000  get 

210 


ADVERTISING 

a  favorable  impression  which  makes  them  receptive  to 
further  exciting  forces,  Hke  recognition  of  the  product 
in  a  store,  pkis  a  clerk's  effort  to  sell  it.  Here  the 
30,000  who  want  to  buy  the  article  represent  the  ex- 
pressed demand,  the  60,000  the  unexpressed  conscious 
demand,  and  the  100,000  the  subconscious  demand. 

This,  of  course,  is  the  simplest  statement  of  a  situa- 
tion that  grows  more  involved  the  deeper  you  penetrate 
into  mail-order  selling  and  other  forms  of  direct  market- 
ing. In  the  case  of  high-priced  office  or  factory  equip- 
ment, which  ordinarily  requires  demonstration  by  the 
maker's  salesman,  the  briefest  request  for  further  in- 
formation or  a  salesman's  visit  would  be  taken  as  ex- 
pressed demand,  though  the  actual  sale  might  be  months 
or  years  away. 

Speaking  broadly,  however,  expressed  demand  stands 
for  immediate  sales  and  unexpressed  conscious  demand 
for  future  sales  if  no  unfavorable  motive  intervenes, 
while  subconscious  demand  means  that  the  field  has 
been  fertilized  but  that  additional  selling  impulses  are 
needed  to  produce  orders.  It  is  quite  true  that  unex- 
pressed conscious  demand  and  subconscious  demand 
are  hard  to  measure  or  appraise.  Yet  both  must  be 
taken  into  account  in  determining  the  advertising  poli- 
cies of  a  business.  To  ignore  either  or  to  neglect  the 
available  means  of  turning  them  into  positive  demand 
might  spell  the  difference  between  success  and  failure. 
Here  again  the  principles  of  balance,  of  interdepend- 
ence, and  of  cumulative  differentials  come  in  to  govern 
the  emphasis  laid  on  each  element  of  the  campaign. 
Intelligent  testing  of  these  elements  in  preliminary 
trials  will  supply  a  basis  for  coordination  and  will  fur- 
nish standards  for  anticipating  the  values  of  the  three 

211 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

kinds  of  demand  created,  in  terms  of  actual  and  poten- 
tial sales. 

Breaking  his  advertising  problem  up  into  its  con- 
stituent problems,  the  manager  finds  that  the  first  of 
these  has  to  do  with  the  materials  of  demand  creation. 
Does  the  product  belong  to  a  class  that  can  be  effec- 
tively advertised.'^  Can  it  be  sufficiently  differentiated 
from  others  of  like  use  to  give  it  an  individuality  or  a 
special  utility  which  will  commend  it  to  the  prospective 
consumer  and  induce  him  to  buy  it  either  direct  or  at 
his  usual  source  of  supply  .^^  Is  the  margin  of  profit 
great  enough  to  justify  the  outlay  necessary  for  pro- 
motion.? Would  increased  volume  allow  such  reduction 
in  unit  factory  and  distributing  costs  as  to  make  up  the 
difference  per  sale.''  Are  potential  consumers  or  possible 
new  uses  numerous  enough  to  render  this  increase  in 
volume  probable.'^ 

Here  enter  the  basic  elements  of  price  and  utility. 
Take  up  any  problem  in  any  phase  of  demand  creation, 
indeed,  and  you  will  find  that  it  cannot  be  solved  satis- 
factorily until  all  the  other  factors  in  distribution  have 
been  given  their  rightful  weight  and  value  in  the  general 
scheme.  For  instance,  a  mistaken  price  policy,  if  per- 
sisted in,  may  neutralize  the  effect  of  a  brilliant  adver- 
tising and  selling  campaign.  A  balance  between  price 
and  utility  must  be  established  in  fact  and  in  the  minds 
of  possible  consumers.  And  utility  may  be  taken  to  in- 
clude both  practical  and  aesthetic  returns  to  the  buyer, 
the  degree  of  adaptation  in  the  product  to  his  needs  and 
tastes,  its  quality,  durability,  perfection  of  design  and 
finish,  and  the  service  which  is  the  sum  of  these  con- 
stituents. Where  the  middleman  takes  part  in  its  dis- 
tribution, its  sales  utility  is  also  closely  related  to  price. 

212 


ADVERTISING 

More  of  this,  however,  in  a  later  chapter  on  price 
policies. 

Such  are  some  of  the  questions  which  should  be  set- 
tled affirmatively  before  an  advertising  campaign  is 
undertaken,  though  the  necessary  adjustments  often 
are  made  unconsciously.  Analysis  and  accommoda- 
tion of  factors,  too,  must  be  carried  much  further.  There 
is  the  character  of  the  demand  to  be  created,  for  example. 
Is  the  product  one  for  which  only  a  temporary  market 
can  be  made,  like  the  fads  in  women's  dress  acces- 
sories which  dominate  but  rarely  outlive  the  season? 
Or  has  it  solid,  enduring  qualities  which  insure  perma- 
nent demand  and  repeat  orders  at  intervals? 

In  the  first  case  the  margin  of  profit  must  be  greater 
and  the  appeal  of  the  advertising  more  urgent.  Since 
immediate  sales  are  the  only  sales  possible,  the  effort 
must  be  to  close  the  maximum  number  before  the  de- 
mand fades  or  competitors  enter  to  dispute  the  market. 
In  the  second  instance,  all  the  profit  from  the  first  sale 
may  be  absorbed  by  the  cost  of  making  the  connection, 
because  the  initial  purchase  is  depended  upon  to  influ- 
ence future  purchasers  and  the  object  is  continuous 
profits  over  a  long  period. 

The  remarkably  low  price  put  on  some  office  and 
store  appliances  is  a  development  of  the  latter  policy. 
The  machine  itself  is  sold  at  cost  or  less  than  the  actual 
delivered  cost,  the  maker  reaping  his  profits  from  the 
subsequent  trade  in  supplies.  Manufacturers  of  food 
and  toilet  specialties  frequently  go  much  further  to  in- 
troduce a  new  product.  A  full-sized  unit  is  either  given 
away  or  sold  at  a  special  price,  though  the  retailer  is 
paid  his  full  profit  on  every  unit  distributed.  Such  ap- 
parently extravagant  practices  are  justffied  when  the 

213 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

margin  of  profit  is  great  and  repeat  orders  can  be  looked 
to  for  long-time  returns. 

The  novelty  or  familiarity  of  the  product  to  the  pro- 
spective buyer  raises  another  problem  in  advertising. 
If  it  be  a  better  or  cheaper  substitute  for  something  he 
is  already  using,  the  task  is  relatively  simple.  The 
points  of  superiority  must  be  demonstrated  in  a  con- 
vincing way  and  their  effect  on  the  user  made  plain,  the 
stress  on  the  arguments  increasing  as  the  difference  in 
price  ranges  up  from  zero.  Recent  campaigns  to  exploit 
men's  trade-marked  underwear  illustrate  this. 

When  a  lower  price  is  the  basis  of  the  appeal,  it  must 
be  shown  that  the  essential  utility  of  the  article  has  not 
been  sacrificed.  Apart  from  the  design  and  finish  of 
the  cabinet  and  other  parts,  the  fifteen-dollar  talking 
machine  is  practically  the  same,  to  any  but  the  culti- 
vated ear,  as  that  which  retails  for  twice  or  thrice  as 
much.  But  the  customer  remains  skeptical  until  he 
has  been  convinced  by  advertising,  perhaps  with  the 
aid  of  a  demonstration  for  which  the  advertising  has 
caused  him  to  ask. 

The  current  tendency  in  marketing  goods  through 
advertising  is  to  emphasize  not  price,  but  the  differen- 
tiation from  staple  types  and  the  closer  adaptation  to 
the  user's  needs.  It  is  only  in  certain  progressively  com- 
petitive fields,  where  a  national  market  and  a  tremen- 
dous number  of  possible  buyers  hold  out  opportunities 
of  economy  through  large-scale  operations,  that  price  re- 
duction is  made  one  of  the  important  talking  points.  The 
exploiting  of  safety  razors,  vacuum  cleaners,  and  dollar 
watches  is  an  example  of  this  policy.  The  motor  car 
supplies  another  striking  instance.  But  here  at  least 
the  effectiveness  of  the  advertising  is  increased  by  the 

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ADVERTISING 

combination  of  the  two  basic  appeals  already  touched 
on  —  extraordinary  improvements  in  the  safety,  econ- 
omy, comfort,  convenience,  beauty,  and  reliability  of 
the  cars  themselves  (in  a  word,  their  utility)  and  equally 
remarkable  reductions  in  selling  prices.  And  to  these 
factors  should  be  added  the  fundamental  conscious 
need  and  subconscious  demand  for  the  transportation 
eflSciency  offered,  both  constantly  stimulated  by  a  flood 
of  advertising  competitive  in  purpose  but  actually 
cooperative  in  its  heightening  of  the  prospect's  desire 
to  possess  an  automobile. 

Except  for  bettered  staples,  however,  few  specialized 
products  encounter  a  developed  need  and  a  waiting 
market.  The  history  of  modern  business  is  a  record  of 
imagination  and  intelligence  applied  to  the  searching 
out  of  valid  but  unrecognized  needs  and  the  invention 
of  new  foods  or  furniture,  apparel  or  machines,  to  sat- 
isfy them.  The  constructive  specialty  manufacturer  is 
a  pioneer  always  a  day's  march  ahead  of  the  general 
public  and  usually  under  the  necessity  of  educating  the 
public  to  perceive  a  particular  need  it  has  lying  latent 
and  to  apply  his  product  to  that  need. 

For  many  years  this  education  was  carried  on  through 
salesmen.  Within  the  last  two  decades,  however,  adver- 
tising has  been  developed  into  a  more  effective  agency 
for  the  transmission  of  ideas  about  the  goods  both  to 
consumers  and  to  the  intervening  middlemen.  Some 
may  prefer  to  date  this  development  from  the  second 
half  of  the  seventeenth  century,  when  manufacturers 
and  retail  shopkeepers  solicited  custom  through  ele- 
gant printed  dodgers  and  the  weekly  newspaper  offered 
a  medium  for  exploiting  books,  patent  medicines,  and 
merchandise  of  various  sorts ;  not  a  few  might  insist  that 

215 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

intelligent  use  of  advertising  is  a  thing  of  very  recent 
years.  Whichever  opinion  the  reader  holds,  there  is  no 
ignoring  the  contrast  between  the  long  process  of  intro- 
ducing the  pioneer  models  of  typewriters,  adding  ma- 
chines, and  other  modern  tools  of  business  through 
salesmen  and  the  rapid  expansion  of  these  industries 
in  recent  years  when  advertising  has  been  developed  to 
the  point  where  it  can  take  over  its  proper  share  of  the 
work  of  demand  creation. 

What  constitutes  that  share  in  the  case  of  his  own 
product  is  one  of  the  manager's  primary  problems.  He 
has  certain  ideas  about  his  product,  which  must  be 
communicated  to  consumers  or  potential  consumers  in 
order  to  stimulate  buying.  If  he  has  a  going  business 
with  an  established  scheme  of  distribution,  his  effort 
will  be  to  discover  where  and  how  he  can  increase  the 
efficiency  of  his  selling  efforts  through  advertising  or 
where  and  how  he  can  substitute  advertising  of  one  kind 
or  another  for  a  more  costly  form  of  demand  creation 
currently  employed. 

Fundamentally  he  has  the  same  need  for  a  general 
knowledge  of  the  advertising  machinery  and  mediums 
at  his  disposal  as  the  man  just  launching  a  new  trading 
venture.  Otherwise  his  choice  and  use  of  mediums  are 
likely  to  be  biased  by  prejudice  or  insufficient  informa- 
tion. Such  a  survey,  except  in  outline,  is  beyond  the 
purpose  of  this  volume,  which  attempts  to  deal  with  the 
problems  of  business  from  the  owner's  or  manager's 
viewpoint  and  assumes  that  he  has  the  aid  of  depart- 
ment executives  in  guiding  the  activities  of  his  business. 
In  this  case,  a  competent  advertising  manager  or  an 
outside  service  agency  would  supply  in  a  qualified  meas- 
ure the  sort  of  counsel  which  a  superintendent  or  works 

216 


ADVERTISING 

engineer  would  bring  to  the  settlement  of  a  question  of 
factory  construction  or  equipment. 

The  distinction  between  general  and  direct  adver- 
tising, as  we  have  already  seen,  rests  on  the  scope  of  the 
appeal  made.  General  advertising  is  addressed  to  the 
public  at  large  or  to  a  considerable  section  of  it.  Direct 
advertising  is  aimed  at  a  specific  individual  or  a  group 
of  individuals  who  have  been  sifted  out  of  the  mass  by 
one  process  or  another  and  classified  as  prospective 
buyers.  It  may  be  said  to  occupy  halfway  ground  be- 
tween the  impersonal  appeal  of  general  publicity  and 
the  individual  contact  of  the  salesman. 

It  is  in  manner  of  approach  rather  than  purpose  or 
function  that  general  and  direct  advertising  diverge. 
A  perfectly  balanced  campaign  might  include  the  use 
of  every  class  of  general  and  direct  mediums,  with  a 
distinct  function  allotted  to  each  class  and  a  different 
appeal  framed  for  each  medium.  And  another  equally 
intelligent  campaign  might  concentrate  on  the  use  of  a 
single  class  of  either  direct  or  general  mediums.  Be- 
tween these  two  extremes,  any  one  of  a  great  number  of 
combinations  of  mediums  and  appeals  might  be  the  one 
to  prove  the  most  effective. 

The  practical  plan,  indeed,  depends  on  so  many 
factors  that  only  a  few  can  be  suggested  here.  The 
character  and  price  of  the  product,  for  example :  is  it  a 
necessity,  a  utility,  or  a  relative  luxury  .^^  An  article  of 
business,  personal,  or  household  use  or  one  of  pleasure? 
A  thing  of  daily  consumption  or  of  long  service?  Is  its 
price  large  or  small  as  compared  with  the  "consumer's 
surplus  "?  Can  its  purchase  and  use  be  extended  by 
judicious  reduction  of  its  cost  and  quality?  Is  it  trade- 
marked  or  otherwise  differentiated  so  that  the  demand 

217 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

created  for  it  cannot  be  diverted  to  similar  competing 
products?  And  so  on  through  a  long  list  of  things  to 
be  considered,  including  the  possibility  of  doing  all  the 
work  of  demand  creation  through  advertising  or  the 
necessity  of  employing  middlemen,  the  agency  adopted 
for  physical  supply,  the  existence  of  mediums  reaching 
the  classes  who  are  prospective  purchasers,  the  degree 
of  intelligence  and  the  reading  and  buying  habits  of 
these  prospects. 

No  small  amount  of  the  waste  in  money  and  effort 
which  has  attended  advertising  in  the  past  was  due  to 
the  failure  of  managers  to  analyze  the  problem,  to  break 
it  up  into  its  constituent  problems,  to  list  the  factors  of 
importance  in  solving  each  of  these  constituent  prob- 
lems, to  put  aside  personal  preferences  or  prejudices  in 
valuing  these  factors,  to  refuse  to  accept  precedents  as 
rules,  to  insist  on  laboratory  standards  in  both  mate- 
rials and  mediums,  and  to  realize  that  advertising  is 
a  distinct  and  separate  activity  needing  a  fresh  view- 
point and  a  new  angle  of  approach  to  be  grasped  and 
effectively  performed. 


218 


CHAPTER  XIV 

ORGANIZATION   OF   DEMAND   CREATION 
ANALYSIS  OF  THE  MARKET 

WHEN  the  manager  of  a  business  has  assembled  his 
materials  of  demand  creation  and  has  considered 
the  agencies  at  his  disposal  for  conveying  them  to  pos- 
sible consumers,  he  faces  the  further  task  of  putting 
the  work  of  idea-transmission  on  a  sound  and  efficient 
basis.  Breaking  his  problem  up  into  its  constituent 
problems,  he  finds  these  are  three  in  number:  first,  to 
discover  how  many  persons  want  his  goods  or  can  be 
induced  to  buy  and  use  them,  who  these  persons  are, 
where  they  are  located,  and  how  often  they  are  likely 
to  come  into  the  market;  second,  to  learn  how  much 
these  prospective  consumers  are  willing  to  pay  for  the 
goods;  and  third,  to  determine  what  agency  or  group 
of  agencies  will  be  the  most  effective  in  creating  an 
adequate  demand. 

His  problem,  in  a  word,  is  one  of  organization;  his 
three  sub-problems  are  analysis  of  the  market,  deter- 
mination of  price,  and  combination  and  coordination  of 
the  agencies  to  be  employed  in  stimulating  demand  in 
the  chosen  market  at  the  predetermined  price.  No  one 
of  the  three  problems  takes  particular  precedence  over 
the  others,  for  like  all  the  factors  and  activities  of  busi- 
ness, they  are  interdependent.  The  extent  of  the  mar- 
ket is  determined  largely  by  the  price,  and  the  price 
cannot  be  fixed  without  considering  its  effect  on  the 
broadening  or  limiting  of  demand.    Again  the  size  and 

219 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

character  of  the  market  and  the  price  of  the  commodity 
(here  also  the  margin  available  for  distribution  expense 
and  profit)  will  go  a  long  way  toward  deciding  what 
agencies  can  be  used  for  demand  creation;  the  agencies 
chosen  will  likewise  have  an  important  bearing  on  both 
price  and  the  width  of  the  market. 

Nor  are  these  policies  strictly  departmental  in  their 
scope  or  application.  They  must  conform  to  the  general 
policies  of  the  management;  they  cannot  be  formulated 
without  considering,  not  alone  their  effect  on  one  an- 
other, but  also  their  influence  on  all  the  other  activities 
of  the  business,  on  production,  distribution,  and  ad- 
ministration. The  principle  of  balance  must  be  ad- 
hered to,  the  organization  of  the  activities  of  demand 
creation  must  be  governed  by  the  same  ratio  of  cost, 
quality,  and  service  which  is  observed  in  production 
and  administration,  as  well  as  in  that  other  function  of 
distribution  still  to  be  discussed,  physical  supply. 

The  market  for  a  commodity  is  made  up  of  the  two 
classes  of  customers  and  prospects,  the  latter  com- 
prising all  those  who  have  an  unexpressed  conscious 
desire  or  subconscious  need  for  the  goods  in  question. 
Demand  creation  must  have  for  its  objective  either  the 
development  of  unrecognized  wants  or  new  uses  for  the 
product  in  the  minds  of  customers  already  on  the  books 
or  the  discovery  and  transformation  of  prospects  into 
new  buyers.  These  prospects  may  be  in  territory  al- 
ready covered  by  the  selling  plan  or  in  territories  further 
afield.  They  may  be  buying  substitutes  or  competing 
goods,  or  they  may  not  be  buying  anything  resembling 
the  product  because  an  unconscious  need  or  subcon- 
scious desire  has  never  been  developed  into  positive 
demand. 

220 


ANALYSIS  OF  THE  MARKET 

In  the  first  approach  to  the  problem,  individuals  do 
not  count  except  as  representatives  of  the  groups  to 
which  they  belong.  It  is  with  the  group  and  its  reaction 
to  his  product  that  the  manager  must  deal,  since  his 
initial  concern  is  to  estimate  possible  sales  volume,  the 
number  of  product  units  for  which  he  can  reasonably 
expect  to  find  buyers  when  his  machinery  of  demand 
creation  has  gathered  headway. 

This  first  survey  is  vital.  It  must  uncover  a  sufficient 
number  of  prospective  purchasers  in  the  chosen  field 
to  insure  a  fixed  minimum  of  sales;  otherwise  the  busi- 
ness remains  merely  a  project  or  settles  down  for  "a 
long  pull  "  while  demand  grows  up  to  it.  The  domestic 
market  for  aeroplanes  early  in  1914,  for  instance,  was 
so  restricted  and  there  was  such  competition  for  the 
attention  of  the  few  rich  sportsmen  who  were  possible 
buyers  that  a  new  aeroplane  business  would  have  been 
a  doubtful  undertaking.  Since  the  outbreak  of  the  Eu- 
ropean war,  however,  the  military  demand  has  brought 
about  such  improvement  in  design  and  production 
methods  and  the  safety  of  flying  has  been  so  thoroughly 
demonstrated  that  much  larger  American  sales  of  ma- 
chines for  sport,  military,  and  business  purposes  may 
be  anticipated  when  the  war  is  over.  This  may  be 
the  more  confidently  expected  since  increased  factory 
facilities,  reduced  production  costs,  and  the  necessity 
of  keeping  enlarged  establishments  busy  are  sure  to  be 
reflected  in  lower  prices  —  another  evidence  that  the 
principle  of  interdependence  never  ceases  to  apply  in 
all  the  activities  of  business. 

In  analyzing  his  market,  the  business  man  faces  an 
indefinite  body  of  possible  purchasers,  widely  distributed 
geographically  and  exhibiting  various  extremes  of  pur- 

221 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

chasing  power,  intelligence,  and  conscious  and  unrecog- 
nized needs.  The  effective  demand  of  the  individual 
depends  not  alone  on  his  ability  to  pay  for  the  product 
offered,  but  also  upon  his  wants  and  tastes  as  cultivated 
or  repressed  by  his  character,  education,  habits,  occu- 
pation, and  economic,  religious,  and  social  environ- 
ments. The  market,  therefore,  splits  up  into  economic 
and  social  strata  as  well  as  into  geographic  divisions. 

Turning  first  to  the  territorial  distribution  of  the  con- 
suming public,  he  finds  any  number  of  factors  influenc- 
ing the  probable  demand  for  his  goods.  If  his  product 
be  designed  for  a  special  and  limited  use,  like  an  im- 
proved breaking  plow  or  cream  separator,  his  market  is 
narrowed  immediately  by  the  exclusion  of  the  millions 
who  live  in  cities  and  in  industrial  districts.  Though 
even  here  it  will  be  well  for  him  to  consider  the  thou- 
sands of  business  men  and  investors  who  own  farms  and 
are  interested  in  the  latest  labor-saving  devices  for  farm 
w^ork.  Means  exist  for  estimating  pretty  closely  the 
extent  of  this  marginal  market  and  the  mediums  of 
demand  creation  for  reaching  it. 

But  towTi  and  country  are  only  the  first  broad  geo- 
graphic divisions  of  the  market.  Continuing  with  agri- 
cultural implements,  for  the  sake  of  simplicity,  the  New 
England  farmer  as  a  prospect  for  improved  machinery 
is  in  a  different  class  from  the  man  in  the  "corn  belt " 
of  Illinois  or  Iowa,  just  as  the  southern  planter  has  very 
little  in  common  with  the  dairyman  of  Ohio  or  Wiscon- 
sin. It  follows  that  the  farmers  of  the  United  States 
cannot  be  successfully  approached  as  a  single  group, 
but  must  be  classified  as  a  number  of  sectional  groups, 
the  members  of  each  group  having  a  general  likeness  in 
their  responsiveness  to  new^  ideas,  in  resources,  and  in 

11% 


ANALYSIS  OF  THE  MARKET 

standards  of  working  and  living,  but  breaking  up  into 
many  sub-groups  according  to  their  dominant  crop  or 
occupational  interests. 

All,  it  is  true,  have  similar  fundamental  needs  for 
wagons,  harness,  plows,  axes,  pumps,  and  so  on.  Once 
away  from  these  necessities,  however,  great  diversity 
is  encountered  in  felt  needs  and  the  mental  attitude 
toward  unfamiliar  things.  Even  in  buying  pumps, 
where  the  New  England  hill  farmer  would  be  content 
with  a  low-priced  wooden  or  iron  pump,  the  Indiana 
man  would  be  likely  to  demand  a  better  grade  and  then 
hitch  a  windmill  to  it,  while  the  Illinois  or  Iowa  stock 
raiser  would  add  a  gasoline  engine  to  insure  him  a  de- 
pendapable  water  supply  at  all  times. 

Climate  and  soil  conditions  are  responsible  for  further 
sub-groupings,  while  the  racial  origins  of  the  people  and 
the  school  conditions  are  further  factors  in  limiting  the 
demands  of  local  sub-groups.  The  surface  character  of 
the  land  under  cultivation  and  the  size  of  farms  must 
also  be  considered  in  determining  the  market  for  the 
larger  tools  of  agriculture  like  oil  tractors,  self-binders, 
gang  plows,  and  motor  trucks. 

Equally  important  in  such  an  analj^sis  is  a  realiza- 
tion of  what  may  be  termed  the  market  contour;  the 
market  is  never  a  level  plain.  It  is  composed  of  dif- 
fering economic  and  social  strata,  though  the  distinc- 
tion between  the  various  levels  is  not  always  apparent 
at  first  glance.  Noting  the  average  size  of  farms  and 
the  land  values  in  the  prosperous  sections  of  the  middle 
west,  for  example,  the  manufacturer  of  a  moderate- 
priced  heating  system  for  country  houses  might  con- 
clude that  here  were  many  prospects  for  the  thing  he  had 
to  sell.    By  carrying  his  analysis  a  little  further,  how- 

223 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

ever,  easily  accessible  statistics  would  show  him  that  a 
large  proportion  of  the  better  farms  are  in  the  hands  of 
tenants,  who  might  be  persuaded  to  put  their  surpluses 
into  motor  cars  or  talking  machines,  but  hardly  into 
permanent  heating  systems.  The  non-resident  owners, 
of  course,  would  be  less  apt  to  make  an  investment 
seemingly  so  unproductive. 

Even  in  the  case  of  farm  necessities,  like  plows  or 
harvesters,  tenant  farming  would  be  an  important  fac- 
tor in  the  analysis,  since  many  tenants  are  obliged  to 
operate  on  credit,  and  the  credit  terms  usual  in  the  ter- 
ritory might  make  too  severe  a  drain  on  the  producer's 
financial  resources.  At  the  least,  they  would  influence 
prices  and  would  present  on  the  whole  a  more  serious 
problem  than  the  credit  situation  in  a  more  recently 
settled  district  where  customers,  though  lacking  ready 
money,  have  the  landowner's  advantage  in  making 
loans. 

This  element  of  market  contour  takes  on  increasing 
significance  when  the  product  is  designed  to  appeal  to 
the  general  public,  without  regard  for  geographic  or  oc- 
cupational lines.  The  distributor  of  a  three-dollar  trade- 
marked  hat  for  men  must  obviously  direct  his  appeal  to 
different  economic  and  social  strata,  must  consider  dif- 
ferent buying  motives,  and  must  adopt  different  selling 
policies,  as  compared  with  the  distributors  of  two  or 
five-dollar  hats.  He  has  this  advantage  over  the  latter, 
that  his  prospects  include  dwellers  in  every  village  of  the 
country  large  enough  to  boast  a  general  store  and  that 
a  city  like  New  York  or  Chicago  offers  him  twenty  or 
perhaps  fifty  neighborhood  centers  of  distribution  as 
against  two  or  three  open  to  the  five-dollar  hat.  But 
he  must  keep  in  mind  the  fact  that  he  will  encounter 

224 


ANALYSIS  OF  THE  MARKET 

forceful  competition  from  established  hats  of  the  same 
or  lower  prices  and  that  absolutely  local  conditions  will 
frequently  determine  the  volume  of  his  local  sales. 

Statistics  of  the  population  will  afford  him  only  initial 
help,  therefore,  in  arriving  at  the  possible  demand  for 
his  products  in  any  given  district  or  community.  He 
will  have  to  investigate  a  number  of  average  neighbor- 
hoods and  communities,  the  retailers  supplying  them, 
the  competing  goods  bought  by  them,  and  the  methods 
used  in  exploiting  those  goods.  Half  a  dozen  surveys 
of  typical  outlying  centers  of  trade  would  give  a  fair 
average  of  conditions,  perhaps,  for  the  whole  of  Chi- 
cago. The  fact  that  New  York  has  been  the  scene  of  a 
greater  number  of  like  investigations  and  "try-out" 
campaigns  would  have  to  be  taken  into  consideration 
in  deciding  whether  the  results  of  such  a  "sampling" 
there  would  be  less  dependable.  Worcester,  Massa- 
chusetts, or  Dayton,  Ohio,  should  supply  data  on  which 
to  base  an  estimate  of  what  industrial  communities, 
east  and  west,  would  offer  in  the  way  of  sales. 

And  so,  up  and  down  the  population  scale,  tjq^ical 
cities  could  be  tested  at  moderate  expense  to  determine 
how  other  towns  of  their  size  and  class  would  receive 
a  new  trade-marked  hat  and  what  selling  efforts  must 
be  put  forth  to  secure  the  attention  of  dealers  and  ulti- 
mate users.  I  need  hardly  add  that  an  analysis  of  the 
market  on  a  national  scale  would  be  useless  expenditure 
except  for  a  business  contemplating  national  distribu- 
tion, or  that  an  analysis  of  the  national  market  for  a 
general  utility  must  recognize  certain  broad  divisions 
of  the  country  with  distinctive  trade  and  social  usages 
certain  to  affect  demand  as  well  as  the  processes  of  de- 
mand creation.    For  the  average  smaller  business  the 

225 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

only  safe  and  economical  way  would  be  to  confine  the 
analysis  to  its  strategic  territory  and  concentrate  selling 
effort  on  this  region,  expanding  as  the  manufacturing 
and  sales  organization  proved  themselves  capable  of 
taking  on  more  work. 

With  a  product  appealing  to  only  a  single  element  of 
the  population,  the  analysis  becomes  more  complex 
and  the  geographical  and  economic  factors  are  more 
difl5cult  to  align.  Take  the  case  of  a  publisher  who  is 
mapping  out  a  selling  campaign  for  a  Catholic  magazine 
or  encyclopedia.  It  is  essential  that  he  take  into  ac- 
count not  only  the  geographic  distribution  of  the  Cath- 
olic population  in  the  United  States,  the  regions  where 
it  is  relatively  dense,  and  the  regions  where  it  constitutes 
only  a  small  part  in  the  population,  but  also  the  con- 
stitution of  that  population  through  the  economic 
strata. 

A  method  of  distribution  successful  in  New  Orleans, 
where  the  denser  Catholic  population  includes  those 
of  all  degrees  of  purchasing  power,  might  well  fail  if 
applied  in  Maine,  where  the  Catholic  population  is  rela- 
tively sparse  and  is  composed  largely  of  French-Cana- 
dian mill  hands.  The  irregularity  of  distribution  of  the 
Catholic  population,  however,  would  be  compensated 
by  the  definite  information  available  about  its  location 
and  its  average  buying  power,  the  latter  influenced  in 
no  small  degree  by  its  sympathy  and  responsivecfess  to 
church  appeals. 

Density  of  population  is  an  element  which  rarely  can 
be  neglected,  either  in  deciding  whether  a  profitable 
market  exists  for  the  goods  or  in  determining  how  a 
possible  market  can  be  developed  and  supplied.  It  is 
here  that  analysis  of  the  market,  price  policies,  and  com- 

226 


ANALYSIS  OF  THE  IVIARKET 

bination  of  demand-creation  agencies  are  most  closely 
interwoven.  Where  population  is  dense  the  means 
of  creating  demand  multiply.  Intensive  cultivation 
by  direct  salesmen,  for  instance,  becomes  possible. 
Where  people  are  widely  scattered,  prospects  may  be 
so  few  that  no  practicable  market  exists  unless  a  com- 
bination of  agencies  can  be  worked  out  which  will  over- 
come the  handicaps  of  distance,  or  unless  a  price  can  be 
secured  which  will  take  care  of  the  extra  selling  cost. 

If  the  manager  "lumps"  his  costs  of  demand  creation 
through  the  salesmen  or  any  group  of  agencies  which  he 
may  be  using  and  strikes  a  balance  for  the  whole  mar- 
ket, he  may  be  "playing  safe"  and  insuring  himself  a 
profit.  But  it  is  certain  that  if  he  ignores  or  fails  to 
detect  the  fact  that  the  salesman  is  an  unprofitable  agent 
in  one  or  several  sparsely  settled  territories,  he  is  mak- 
ing a  double  sacrifice  of  profit  —  that  which  he  must 
substract  from  his  net  returns  in  densely  populated  dis- 
tricts to  make  up  these  individual  deficits  and  that 
which  he  probably  would  earn  in  the  unprofitable  terri- 
tories if  through  analysis  and  tests  he  were  to  discover 
the  right  agency  or  combination  of  agencies  to  cope  with 
local  conditions.  Again,  if  the  manager  bases  his  esti- 
mate of  the  average  cost  of  selling  for  the  whole  market 
on  his  experience  in  a  few  densely  populated  or  easily 
accessible  territories,  he  may  easily  go  wrong.  Such 
a  test  cannot  fairly  represent  the  possibilities  of  the 
larger  and  differently  constituted  general  field. 

The  typical  business  man  seldom  appreciates  the  im- 
portance of  market  contours  in  their  relation  to  the 
distribution  of  his  product.  His  method  is  the  familiar 
"trial  by  error."  He  sends  his  salesmen  or  his  direct 
advertising  to  dealer-prospects  or  consumer-prospects 

227 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

until  he  gets  a  positive  or  a  decidedly  negative  result. 
With  a  large  margin  of  profit,  this  method,  though 
costly,  frequently  proves  effective  for  a  time.  But  for 
the  product  in  a  competitive  field,  analysis  of  the  market 
is  indispensable. 

The  motives  to  which  a  product  appeals  may  differ 
widely  in  the  various  social  strata  of  the  market.  The 
materials  of  demand  creation,  the  ideas  about  the  prod- 
uct which  will  arouse  a  desire  for  its  possession  in  one 
level  or  section  of  a  city's  population,  are  not  always 
effective  when  used  to  reach  another  section. 

Low  price  and  wearing  qualities  rather  than  fineness 
of  finish  or  exclusiveness  of  design  will  appeal  to  con- 
sumers having  small  incomes,  and  thus  naturally  to  the 
retailers  who  serve  them.  These  arguments  would  not 
have  the  same  force  on  consumers  in  the  higher  economic 
levels  to  whom  quality  of  materials  and  finish  and 
beauty  or  convenience  in  design  would  probably  be  of 
prime  importance.  Many  articles  of  daily  use,  it  may 
be  added,  achieve  the  marketing  ideal  of  general  appeal 
to  all  classes,  either  because  their  enduring  quality  or 
essential  utility  overshadows  the  price  objection  or  be- 
cause sentiment  or  social  emulation  becomes  a  factor 
in  the  purchase.  The  presence  in  our  cities  and  indus- 
trial towns  of  large  populations  of  foreign  birth,  with 
traditions,  tastes,  buying  habits,  and  standards  of  value 
all  their  own,  and  with  varying  degrees  of  intelligence 
and  acquaintance  with  the  English  language,  further 
complicates  this  matter  of  market  location  and  puts  a 
premium  on  painstaking  analysis. 

Innumerable  businesses  recognize  the  existence  of 
market  contours  by  putting  out  their  product  in  two 
or  more  grades,  retaining  as  much  of  the  essential  util- 

228 


ANALYSIS  OF  THE  MARKET 

ity  or  style  as  is  compatible  with  the  reductions  in  price 
which  will  bring  the  various  grades  within  reach  of 
prospects  on  various  economic  planes.  This  is  accepted 
practice  among  manufacturers  of  clothing  for  both  men 
and  women,  watches,  talking  machines,  cameras,  hand 
tools,  and  a  long  list  of  other  products  having  general 
appeal. 

It  is  likewise  a  basic  policy  in  the  more  advanced 
retail  stores.  Some  of  these  not  only  maintain  base- 
ment departments  frankly  offering  medium  and  low- 
priced  substitutes  for  the  more  substantial  or  costly 
lines  displayed  on  the  main  selling  floors,  but  also  break 
up  their  important  departments,  such  as  women's  cloth- 
ing, shoes,  millinery,  and  furniture,  into  sections  divided 
on  lines  of  price  and  thus  advertised.  The  woman  who 
is  able  to  pay  only  eighteen  dollars  for  a  suit  is  recog- 
nized as  a  class  quite  as  well  worth  catering  to,  because 
of  the  number  of  individuals  involved  and  therefore 
the  sales  volume  and  rate  of  turnover  that  are  possible, 
as  the  women  whose  standards  of  dress  make  thirty- 
five,  fifty,  or  one  hundred  dollars  the  minimum  outlay. 

Nor  is  it  forgotten  that  despite  the  emphasis  put  on 
price,  the  real  standard  is  one  of  values  and  that  buyers 
will  cross  their  customary'  lines,  paying  more  than  usual 
or  making  extra  purchases  when  the  inducement  is 
sufficient.  Accordingly,  great  technical  skill  and  finan- 
cial resources  are  often  brought  to  bear  on  these  base- 
ment stores  and  department  sections  in  providing 
maximum  values  within  fixed  price  ranges.  Thej'  are 
comparatively  recent  innovations  in  retailing,  trace- 
able, I  think,  to  the  realization  by  store  managers  that 
the  local  market  is  made  up  of  several  economic  levels, 
and  that  the  problem  of  sales  volume  and  stability  is 

229 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

one  of  general  and  particular  appeals  to  all  these 
classes. 

There  are  stores,  of  course,  which  concentrate  on  one 
or  two  of  the  classes  at  the  top  of  the  scale  just  as  there 
are  manufacturers  of  exclusive  pianos  and  motor  cars, 
jewelry  and  silverware,  who  ignore  all  but  the  few  who 
can  put  quality  and  individuality  of  product  above 
price.  In  fact,  the  specialty  shop  and  the  producer  of 
exclusive  merchandise,  both  of  them  outgrowths  of  more 
intensive  analysis  of  the  market,  have  so  multiplied  in 
recent  years  that  they  have  kept  pace  with  what  might 
be  called  the  democratization  for  profit  of  the  large 
retail  store. 

One  instance  will  illustrate  the  transformation  which 
an  intelligent  market  analysis  can  effect  in  an  established 
business.  Taking  over  the  conduct  of  an  important  St. 
Louis  store,  a  few  years  ago,  a  new  manager  was  amazed 
at  a  forty  per  cent  slump  in  sales  during  the  summer 
vacation.  Railroad  statistics  indicated  that  about 
55,000  persons  went  away  for  a  fortnight  or  longer  dur- 
ing July  and  August.  That  the  absence  of  seven  per  cent 
of  the  population  for  a  part  of  the  time  should  cause  a 
forty  per  cent  reduction  in  sales  suggested  to  the  man- 
ager that  the  merchandising  plan  of  the  store  was  badly 
out  of  balance. 

Checking  July  deliveries  on  a  route  map  of  the  city 
visualized  this  lack  of  balance.  Sixty  per  cent  of  the 
deliveries  had  been  made  on  seven  routes  in  the  better 
residence  districts.  On  five  of  the  seven  the  July  de- 
liveries numbered  only  half  those  made  in  June;  on 
two  others  the  decrease  was  much  smaller.  On  four 
other  routes  which  covered  two  thirds  of  the  total  area 
of  the  city,  the  falling  off  was  negligible;   but  on  the 

230 


ANALYSIS  OF  THE  IVIARKET 

basis  of  the  number  of  parcels  handled,  these  four  dis- 
tricts accounted  for  only  thirty-two  per  cent  of  the 
July  business. 

The  outstanding  fact  from  this  analysis  was  that  the 
store  was  neglecting  the  great  market  stratum  made  up 
of  wage  earners  and  thrifty  salaried  folk,  who  did  not 
take  long  vacations  but  did  buy  dependable  medium- 
priced  merchandise  all  the  year  round.  The  remedy 
was  obvious;  it  was  to  stock  the  lines  and  grades  that 
would  appeal  to  these  neglected  prospects  and  to  let 
them  know  about  the  goods  by  means  of  an  intensive 
campaign  of  direct  and  general  advertising.  The  prob- 
lem as  to  what  kinds  and  classes  of  merchandise  should 
be  stocked  was  a  further  serious  exercise  in  market 
analysis.  The  correctness  of  the  first  broad  analysis 
was  proved  by  steadily  mounting  store  sales  and  by  a 
vacation  business  the  following  year  that  wiped  out 
the  former  deficits. 

For  a  new  product  in  an  occupied  field,  analysis  of  the 
market  involves  much  more  than  the  classification  of 
economic  strata  in  your  selling  field,  the  testing  of  their 
reactions  to  your  materials  of  demand  creation,  and  a 
survey  of  the  available  agencies  of  demand  creation 
with  their  relation  to  your  production  and  sales  plan. 
The  following  list  of  factors  is  suggested  by  MacMartin 
as  an  essential  preliminary  to  a  study  of  national  dis- 
tribution. 

(a)  The  present  annual  consumption  of  similar  products  or 
of  those  for  which  your  product  would  prove  a  substitute. 

(6)  The  per  capita  consumption  among  adult  men  and 
women  or  of  the  particular  classes,  by  age,  to  which  your 
product  will  appeal. 

(c)    The  territorial  variations  in  the  consumption, 

231 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

(d)  The  classes  of  dealers  now  handling  a  similar  article. 

(e)  The  classes  of  trade  sold  by  these  dealers. 

(/)  The  sales  and  advertising  policies  and  plans  of  com- 
petitors. 

(g)  The  volume  of  business  secured  at  the  present  time 
by  various  competitors,  with  regard  especially  to  the  kind, 
quality,  finish,  and  price  of  the  product  each  is  marketing. 

(h)  The  percentage  of  repeat  sales  competitors  seem  to 
be  able  to  secure. 

Consideration  of  all  these  factors  certainly  should  sup- 
plement analysis  of  the  market  from  the  viewpoint  of  its 
economic  and  social  levels.  How  far  it  would  be  pos- 
sible to  obtain  dependable  information  covering  all  the 
points  listed  would  depend  on  the  nature  of  the  busi- 
ness and  the  character  of  the  products.  Statistics  on 
consumption  are,  in  general,  far  from  accurate;  except 
in  highly  competitive  fields,  a  special  investigation,  by 
the  sampling  method  at  least,  would  be  necessary  to 
secure  the  specific  information  on  which  sound  policies 
are  based. 

It  might  be  well  to  carry  the  inquiry  beyond  mere 
market  factors.  Business  is  a  competition  of  individuals 
as  well  as  of  products.  Your  analysis  of  the  market, 
then,  is  not  complete  unless  you  know  all  that  can  be 
learned  about  the  major  influences  that  affect  that 
market.  What,  then,  of  the  organizations  and  the  men 
behind  the  products  your  goods  must  meet.^^  What  are 
their  characters.'^  Their  attitude  toward  business? 
Their  experiences^  The  capacities  of  their  organizations  ? 
Their  capital  and  resources.'^ 

It  is  of  importance  to  know  whether  your  competitors 
are  dreamers  and  fighters,  willing  to  risk  all  they  have  for 
the  sake  of  the  business  and  their  vision  of  its  future,  or 
whether  they  are  conservatives  insisting  on  their  annual 

23^ 


ANALYSIS  OF  THE  MARKET 

profits  and  grudging  expenditures  that  are  not  imme- 
diately productive.  You  ask  whether  they  are  new- 
comers in  the  field  or  whether  they  have  the  background 
of  emergency  knowledge  acquired  only  by  those  who 
have  grown  up  in  a  trade.  Are  their  making  and  selling 
forces  competent  and  efficient  and  the  routine  of  their 
production  and  distribution  activities  well  established.'' 
Is  their  selling  plan  positive  yet  flexible  enough  to  adjust 
itself  to  unusual  situations.'*  And  finally,  have  they  re- 
sources more  or  less  ample  than  your  own.'' 

Abundant  capital  will  enable  them  to  perfect  their 
products,  to  secure  good  men  for  all  important  positions, 
to  install  the  best  equipment  and  standardize  all  their 
factory  and  sales  operations,  to  finance,  build  up,  and 
train  a  capable  sales  force,  to  test  their  materials  of 
demand  creation,  to  buy  materials  in  the  lowest  cash 
market,  to  make  easier  terms  to  dealers  and  consumers, 
to  offer  free  trials  of  the  product,  to  carry  on  extensive 
advertising  campaigns  to  exploit  their  goods,  their 
terms,  and  their  service.  Capital  alone  will  not  do  all 
these  things;  it  only  renders  them  possible.  But  the 
possibilities  as  well  as  the  actualities  of  competition  are 
elements  which  the  manager  of  a  new  undertaking  or  of 
an  old  business  expanding  must  consider  in  the  analysis 
of  his  market.  That  market,  when  all  prior  claims  have 
been  subtracted,  may  prove  to  be  no  market  at  all. 


233 


CHAPTER  XV 

ORGANIZATION  OF  DEMAND  CREATION 
PRICE  POLICIES 

SINCE  gain  is  the  immediate  aim  of  business,  it  seems 
obvious  that  the  price  which  a  manufacturer  obtains 
for  his  product  must  be  based  on  factory  cost,  with 
sales  and  deHvery  expense  and  an  allowance  for  profit 
added.  Taking  a  line  of  trade  or  all  articles  of  the  same 
class  as  a  whole,  this  is  true;  income  must  exceed  outgo 
or  a  business  soon  exhausts  its  resources.  But  the  in- 
dividual manager's  price  problem  seldom  takes  rise  in 
the  factory,  nor  is  it  solved  by  simple  addition  of  the 
elements  of  delivered  cost. 

Usually  the  process  is  reversed.  The  established  mar- 
ket price  for  the  article  or  for  substitutes  having  the 
same  general  function  or  utility  is  the  starting  point  as 
well  as  the  imperative  factor  in  the  solution  of  the 
problem.  In  fixing  this  market  price,  over  short  periods 
or  single  selling  seasons,  even  a  basic  element  like  the 
cost  of  raw  materials  is  a  consideration  secondary  to  the 
economic  relations  of  supply  and  demand  for  the  fin- 
ished goods.  1 

^  A  study  of  the  relations  between  quotations  for  raw  cotton  and  the 
market  price  of  three  well-known  lines  of  bleached  muslins,  Lonsdales, 
Hopes,  and  Lonsdale  cambrics,  from  1879  to  1914,  discloses  an  interesting 
example  of  an  economic  principle  at  work.  Despite  the  fact  that  standardi- 
zation of  products  and  processes  had  been  carried  further,  perhaps,  in  cot- 
ton textiles  than  in  any  other  important  industry,  a  comparison  of  the  cost 
of  raw  cotton  and  the  prices  for  finished  goods  show  frequent  and  sharp 
divergences  where,  because  of  manufactiu-ing  conditions,  close  parallels 
might  be  expected.    Again  and  again  advances  attended  reductions  in  costs 

£34 


PRICE  POLICIES 

There  are  practical  grounds  for  this  approach,  though 
the  rule  of  thumb  enters  too  much  into  price-fixing, 
and  too  often  producers  launching  a  new  commodity  go 
on  the  assumption  that  the  prevailing  market  price  for 
any  given  grade  is  right.  They  trust  to  their  own  re- 
sourcefulness or  the  ingenuity  of  their  works  executives 
to  turn  out  the  same  thing  at  a  margin  of  profit.  Ex- 
perience has  taught  them,  too,  that  the  first  factory 
output  of  a  new  article  is  usually  at  a  cost  higher  than 
the  level  easily  maintained  when  the  operations  have 
become  familiar,  when  lost  motion  has  been  eliminated, 
and  continuous  production  has  cut  down  incidental 
wastes. 

The  decisive  reason  for  considering  the  market  quo- 
tations for  competing  goods  as  a  basis  in  fixing  prices  is 
the  necessity  of  making  sales.  But  unless  in  the  long 
run  the  price  is  such  that  the  product  can  be  moved 
from  the  warehouse  floor  and  placed  in  the  hands  of  the 
consumer  at  a  profit,  the  whole  process  of  its  production, 

of  materials,  and  reductions  were  made  while  the  market  for  raw  cotton 
was  rising. 

Commenting  on  the  figures,  which  it  secured  and  pubhshed,  "  The  Journal 
of  Commerce  "  had  this  to  say  about  how  prices  are  controlled  by  the  law 
of  supply  and  demand: 

"  Many  traders  have  come  to  believe  that  trading  values  are  fixed  by  the 
value  of  the  materials  and  production  cost  represented  in  them.  Time  and 
again  this  belief  has  been  shown  to  be  an  economic  fallacy.  The  shrewd 
trader  in  merchandise  is  the  one  who  gauges  his  selling  price  by  the  possi- 
ble demand  for  what  he  has  to  sell,  and  the  supply  of  such  merchandise  is 
the  factor  that  measures  the  success  of  distribution. 

"  These  figures  show  that  time  and  again  cloth  values  have  risen  and  been 
maintained  without  regard  to  the  cost  of  the  raw  material  values  represented 
in  the  merchandise.  The  manufacturer  naturally  looks  upon  values  from  his 
own  viewpoint,  which  is  the  one  of  cost  of  production.  But  the  merchant 
must  consider  other  factors.  The  potential  supply  in  the  markets,  the  power 
of  the  buyer  to  purchase  and  distribute,  and  the  inherent  worth  of  the  goods 
in  competition  are  powerful  factors,  and  they  are  the  ones  that  must  govern 
the  judgment  of  the  trader." 

235 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

distribution,  and  administration  is  a  useless  thing.  The 
price,  therefore,  must  be  adjusted  to  the  conditions  that 
govern  in  both  factory  and  market.  It  need  not  be  the 
highest  that  can  be  obtained  from  a  Hmited  group  of 
buyers  nor  the  lowest  that  will  yield  a  fair  gain.  The 
practical  ideal  is  the  price  which  will  satisfy  the  present 
needs  of  the  business  yet  conserve  all  the  opportunities 
of  profit  which  the  future  holds. 

Take  the  manufacturer  of  an  article  competing  with 
commodities  substantially  identical  in  kind  or  func- 
tion; how  shall  he  determine  what  the  price  shall  be.'' 
Analyzing  his  problem,  he  finds  first  of  all  that  he 
has  choice  of  three  general  price  policies:  (1)  selling  at 
the  market  minus,  (2)  selling  at  the  market  par,  and  (3) 
selling  at  the  market  plus.  The  economist  would  find 
slightly  different  terms  for  these,  describing  them  in 
turn  as  selling  below  the  normal  price,  selHng  at  the 
normal  price,  and  selling  above  the  normal  price.  For 
our  purpose,  however,  the  question  of  terminology  is  not 
significant.  It  is  enough  that  there  are  these  three  dis- 
tinct policies  available,  and  that  the  business  man  may 
adopt  any  one  of  these  to  the  exclusion  of  the  others  or 
may  use  two  or  more  of  them  in  combination  to  effect 
his  purpose. 

Selling  at  the  market  minus  aims  to  increase  the  vol- 
ume of  sales  by  reducing  the  price.  It  is  founded  on  the 
trading  axiom  that  small  profits  on  individual  transac- 
tion mean  a  large  turnover.  It  is  the  business  man's 
recognition  of  the  truth  expressed  in  the  generalization 
of  economic  theory  that  lower  prices  will  increase  the 
amount  demanded  in  the  market.  Theoretically,  at 
least,  the  man  who  sells  his  product  at  a  price  below  the 
figure  established  by  competitors  attracts  the  customers 

236 


PRICE  POLICIES 

of  other  distributors.  His  lower  price  also  means  that 
they  can  buy  more  units  of  his  commodity  with  the  same 
total  expenditure,  thus  insuring  him  increased  volume 
and  corresponding  increase  in  his  units  of  gain. 

But  other  buyers  besides  those  already  in  the  market 
are  now  able  to  enter.  Those  whose  unexpressed  de- 
mand was  not  effective  before,  because  they  placed  a 
higher  value  on  the  money  in  their  possession  or  upon 
other  commodities  which  could  be  purchased  with  it, 
now  come  into  the  market.  The  result  is  that  a  much 
larger  amount  of  the  commodity  is  distributed.  This 
is  true,  in  theory,  at  least,  though  in  practice  lower 
prices  do  not  always  over  short  periods  attract  cus- 
tomers from  their  habitual  trading  places.  Estab- 
lished credit  arrangements,  congenial  personal  relations, 
all  the  forces  we  include  under  "habit"  and  the  factors 
classified  under  "good  will"  work  in  opposition  to  the 
purely  economic  motive.  It  is  only  in  the  long  run  that 
these  deterrent  influences  are  overcome  and  competi- 
tion works  out  its  uniform  result. 

Selling  at  the  market  minus  does  not  ordinarily  in- 
volve a  differentiation  of  the  product  from  the  stock 
product  of  like  nature,  though  there  are  many  excep- 
tions to  the  rule.  Nor  are  trade-marks,  brands,  or 
trade  names  always  used.  The  producer  depends  upon 
the  lower  price  to  attract  purchasers  in  numbers  and 
looks  to  a  larger  turnover  to  give  a  reduced  propor- 
tion of  overhead  expense  per  unit  sold.  He  also  de- 
pends upon  lower  factory  costs,  made  possible  by  the 
economies  of  larger  scale  production,  to  add  further 
savings.  These  two  forces  together  extend  his  area  of 
profit,  and  he  operates  at  increasing  returns.  Yet  from 
the  point  of  view  of  distributing  policy  the  difference  in 

237 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

price  forms  the  basis  of  the  appeal  to  the  consumer. 
And  the  successful  use  of  the  policy  in  a  competitive 
market,  therefore,  depends  upon  continual  ability  to  un- 
dersell distributors  of  substantially  identical  products. 

This  policy  finds  illustration  in  the  sales  plans  of  a 
great  many  department  stores.  It  is  the  basis  of  bar- 
gain-counter selling;  and  in  the  bargain  department 
stores,  selling  at  the  market  minus  is  the  dominant 
policy.  Their  businesses  are  organized  and  operated 
with  an  eye  single  to  selling  under  the  market.  They 
ransack  the  country  in  their  search  for  bankrupt  stocks 
and  the  excess  stocks  of  sound  wholesale  and  retail  con- 
cerns which  have  overbought  in  certain  lines  or  under- 
sold because  of  local  weather  or  industrial  conditions. 
They  advertise  these  bankrupt  stocks,  mill  ends,  and 
wholesale  clearances  as  the  basis  of  their  ability  to  offer 
standard  goods  at  cut  prices.  Many  of  them  operate 
on  a  cash  basis  and  are  thus  able  to  take  advantage  of 
the  opportunity  for  close,  buying  offered  by  the  tem- 
porary difficulties  of  other  merchants. 

Many  others  adopt  the  policy  of  dealing  in  "seconds  " 
or  in  sub-standard  goods  which  resemble  standard 
products  but  have  been  cheapened  by  the  dropping  of 
say  ten  threads  to  the  square  inch  in  a  silk  or  cotton 
fabric  or  the  slighting  of  quality  or  finish  in  wood  or 
metal  product.  The  enormous  trade  in  sub-standard 
merchandise  may  be  regarded  as  an  outgrowth  of  the 
policy  of  selling  at  the  market  minus,  though  logically 
it  is  an  effort  to  differentiate  commodities  from  the 
price  viewpoint  and  adjust  them  to  the  needs  and  re- 
sources of  social  strata  less  exacting  than  those  for 
whom  the  originals  were  created. 

But  nearly  all  department  stores  at  times  reduce 

2SS 


PRICE  POLICIES 

prices  upon  staple  commodities  either  to  attract  cus- 
tomers to  a  current  sale  or  as  a  permanent  store  policy. 
Here  the  increased  volumes,  arising  from  trade  drawn 
from  competitors  and  from  new  consumers  brought  into 
the  market,  decrease  the  proportion  of  overhead  ex- 
pense each  unit  must  bear  and  allow  purchases  in  larger 
quantities.  These  larger  quantities  put  the  manager 
into  a  position  to  force  the  producer  to  share  with  him 
the  economies  of  large-scale  production.  He  demands 
and  secures  the  jobbers'  prices.  Often,  indeed,  he  is 
able  to  take  over  the  entire  output  of  certain  factories, 
and  in  some  cases  he  deems  it  advantageous  to  operate 
factories  of  his  own,  a  procedure  which  he  has  had  to 
share  recently  with  the  "chain  stores "  which  are 
making  advances  in  every  part  of  the  country  and  with 
many  defensive  buying  associations  of  small  retailers. 
In  the  department  store,  moreover,  the  customer  at- 
tracted by  the  offer  of  a  staple  commodity  at  less  than 
the  prevailing  price  is  likely  also  to  purchase  other  com- 
modities yielding  a  wider  margin  of  profit. 

This,  indeed,  is  the  motive  at  the  back  of  almost  every 
bargain  sale  advertised  by  a  store  selling  standard  mer- 
chandise; it  aims  to  bring  the  customer  into  the  store 
and  within  range  of  its  countless  selling  influences, 
even  at  the  sacrifice  of  all  profit  on  the  "  leaders  "  adver- 
tised. The  "leaders"  offered  by  the  catalogue  houses 
are  in  exactly  the  same  category.  I  am  not  criticising 
such  bargain  advertising,  but  only  recognizing  its  pur- 
pose, as  every  business  man  must  in  considering  his  own 
price  policies.  The  majority  of  producers  and  merchants, 
indeed,  make  use  of  "leaders"  to  exploit  their  regular 
lines,  nor  should  such  bargain  events  be  confused  with 
the  clearing  sales  of  overstocks  of  seasonal  goods  which 

239 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

merchants,  wholesale  and  retail,  find  advisable  at  the 
end  of  each  selling  period.  These  clearing  sales  are  not 
to  be  classed  with  selling  under  the  market,  because 
the  psychic  value  of  the  merchandise  to  the  consumer 
has  fallen  since  the  season  was  young. 

To  the  manager  putting  out  a  new  product  in  a  com- 
petitive field,  selling  at  the  market  minus  is  the  easy 
method  of  securing  distribution.  If  middlemen  are 
essential  to  his  plan,  they  will  expect  a  price  concession 
as  an  inducement  to  stock  and  push  the  article.  The 
larger  the  concession  the  greater  will  be  their  interest  in 
diverting  demand  from  established  lines  giving  them  less 
return.  It  may  not  be  necessary  to  cut  the  retail  price; 
so  great  is  the  influence  of  the  average  retailer  on  the 
buying  of  his  customers,  outside  the  large  cities,  that  he 
will  have  little  trouble  in  substituting  an  honestly  made 
product  on  his  own  assurance  that  it  is  good. 

To  this  substitution  nationally  advertised  brands 
offer  serious  impediment,  as  do  also  distinctive  trade- 
marked  specialties  long  in  the  market  and  usually  asked 
for  by  name.  Even  against  advertised  articles,  the 
dealer  with  an  established  following  can  make  the  first 
sale  of  the  new  product  by  suggesting  or  demonstrating 
its  chief  selling  points  and  urging  its  purchase.  Repeat 
orders  then  will  depend  on  the  impression  the  product 
makes  on  the  user.  Should  its  value  seem  less  than  that 
of  established  competing  goods,  the  retailer's  favor  will 
not  keep  it  moving;  and  the  cost  to  the  consumer  of  the 
new  commodity  will  have  to  be  lowered  to  the  point 
where  the  balance  favors  price  on  the  one  hand  as 
against  well-known  quality  and  service  on  the  other. 

The  bulk  of  non-trade-marked  specialties  and  of  goods 
which  carry  dealers'  brands  are  distributed  below  the 

240 


PRICE  POLICIES 

normal  market  price.  The  theory  of  such  distribution 
is  sound  enough.  The  middleman  by  undertaking  all 
the  work  of  demand  creation  relieves  the  producer  of 
this  effort  and  expense  and  allows  him  to  give  all  his 
time  to  manufacturing  operations.  The  margin  between 
the  open  market  price  and  the  price  actually  charged  the 
middleman  is  the  latter's  pay  for  the  function  he  per- 
forms in  demand  creation.  The  disadvantage,  from  the 
manufacturer's  standpoint,  is  that  the  origin  of  his 
product  usually  is  not  impressed  on  consumers  in  any 
way  and  he  thus  loses  the  repeat  orders  which  its  excel- 
lences should  bring  him.  Either  the  wholesaler  or  re- 
tailer is  at  liberty  to  switch  this  demand  to  a  substitute 
at  a  moment's  notice. 

A  great  many  makers  of  trade-marked  products  also 
deliberately  adopt  the  policy  of  selling  under  the  mar- 
ket because  of  the  powerful  buying  appeal  resident  in  a 
lower  price.  A  new  concern  is  almost  forced  to  offer 
some  such  inducement  to  purchase.  It  is  the  recognized 
way  of  entering  the  market,  except  when  the  product  is 
obviously  superior  to  the  thing  it  would  displace  or 
when  its  less  distinctive  quality  or  utility  is  exploited 
by  direct  salesmen  or  consumer  advertising.  Like  the 
producer  himself,  the  middleman  is  in  business  to  make 
all  the  money  he  can;  and  a  new  product  affords  oppor- 
tunity for  a  better  bargain  in  exchange  for  the  outlet  the 
manufacturer  must  have. 

A  new  brand  of  parlor  matches,  for  instance,  may  be 
in  every  way  equal  to  the  matches  he  has  been  distribut- 
ing either  for  resale  or  for  use;  but  unless  there  is  an  evi- 
dent waiting  market  for  it,  there  is  no  reason  why  he 
should  invest  capital,  devote  space  and  time  to  it,  and 
take  the  risks  involved  unless  it  gives  him  greater  re- 

241 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

turns.  If  he  can  buy  the  new  match  for  ten  or  fifteen 
cents  a  case  cheaper  than  competing  brands,  he  has  a 
motive  for  handhng  it  and  for  trying  to  create  demand 
for  it. 

The  same  market  situation  faces  the  manufacturer 
of  any  one  of  a  thousand  staples  and  semi-specialties 
distributed  through  trade  channels.  In  a  lesser  degree 
it  applies  to  highly  differentiated  specialties  of  many 
sorts,  including  those  marketed  through  direct  sales 
forces.  Given  approximately  equal  quality,  utility, 
and  prestige,  ability  to  "shade  the  price"  is  often  the 
deciding  factor  in  a  sale.  Such  ability,  of  course,  may 
be  the  result  of  low  production  costs,  of  economies  in 
distribution  or  administration,  or  of  unusually  effective 
organization  of  all  the  activities  of  the  business.  It  il- 
lustrates again  the  law  of  interdependence  which  threads 
through  all  these  operations.  But  unless  the  delivered 
cost  of  the  goods,  as  compared  with  competing  lines, 
is  low  enough  to  permit  the  necessary  reductions,  adop- 
tion of  the  policy  of  selling  at  the  market  minus  is  no 
•  more  than  a  deferred  invitation  to  the  sheriff  to  take 
charge. 

Another  important  consideration  here  is  the  influence 
of  the  lowered  price  in  bringing  new  consumers  into  the 
market.  Chart  III,  on  the  opposite  page,  illustrates 
the  action  of  this  policy. 

The  curve  of  the  line  L-M,  of  course,  is  hypothetical. 
The  diagram  is  incomplete  also,  because  it  does  not  indi- 
cate the  important  factor  that  other  producers  are  selling 
at  a  higher  level  and  that  customers  are  attracted  from 
them,  or  that  old  customers  are  likely  to  increase  the 
amount  of  their  purchases  as  the  price  decreases.  How 
far  this  is  true  depends  upon  the  contour  of  the  curve. 

£42 


PRICE  POLICIES 

If  L-M  is  nearly  horizontal,  that  is,  if  the  demand  is 
elastic,  a  small  decrease  of  price  will  bring  a  large  num- 
ber of  purchasers  into  the  market.  On  the  other  hand, 
as  L-M  turns  toward  the  vertical,  fewer  purchasers  will 


Cii.uii-  III 

This  chart  attempts  to  show  graphically  the  operation  on  the  demand  side  of  the  maricet 
of  the  price  policy  termed  "selling  at  the  market  minus."  On  the  ordinate  ox  is  laid  off  a 
scale  of  prices  for  the  commodity.  On  the  abscissa  oy  are  laid  off  the  number  of  purchasers. 
The  arc  LM  shows  the  number  of  purchasers  at  a  given  price,  growing  fewer  as  the  price  in- 
creases and  greater  as  the  price  decreases. 

Now  if  oa  represents  the  prevailing  market  price  for  the  commodity,  and  oc  the  number  of 
purchasers  at  that  price,  it  is  apparent  that  if  the  price  is  reduced  from  oa  to  oa',  new  con- 
sumers will  be  brought  into  the  market  and  the  number  of  purchasers  at  the  price  oa'  will  be 
oc',  a  number  greater  than  oc. 


enter  the  market  at  any  given  price.  Here  the  demand 
is  said  to  be  inelastic,  as  is  the  case  with  the  necessaries 
of  life. 

A  certain  amount  of  salt  will  be  bought,  no  matter 
what  the  price.  A  high  price  will  check  consumption  to 
some  extent,  and  a  low  price  will  encourage  liberal,  even 
careless  use.  But  once  the  supply  indispensable  to  the 
support  of  life  is  secured,  the  demand  falls  off  rapidly. 
The  business  man  adopting  the  policy  of  selling  at  the 
market  minus,  therefore,  must  determine  whether  the 
demand  for  his  product  is  elastic  or  inelastic.     Is  he 

243 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

selling  a  necessity  or  a  luxury?  The  success  or  failure 
of  his  campaign  may  depend  on  the  care  with  which  he 
makes  his  analysis. 

Selling  at  the  market  par  was  the  distribution  policy 
characteristic  of  the  period  during  which  the  stress  was 
on  production.  It  is  still  a  common  policy  in  the  mar- 
keting of  staple  goods.  Briefly  this  policy  consists  in 
the  acceptance  of  the  market  price  existing  for  the  com- 
modity. The  producer  does  not  seek  to  attract  pur- 
chasers by  maintaining  a  price  somewhat  lower  than 
that  at  which  his  competitors  sell,  nor  does  he  attempt 
to  establish  his  product,  as  a  distinct  commodity,  upon 
a  new  and  higher  price  basis.  He  recognizes  the  market 
price  as  something  beyond  his  control  and  he  sells  his 
commodity  at  this  established  level. 

With  this  price  policy,  the  merchant-producer  has  two 
general  methods  of  increasing  his  area  of  profit.  He 
may  devote  himself  to  reducing  his  factory  expense  by 
a  better  organization  of  his  plant,  or  he  may  seek  to  in- 
crease his  sales,  in  order  to  secure  the  economies  of  large- 
scale  production  and  a  reduced  proportion  of  overhead 
expense  on  each  unit  of  product  turned  out. 

A  field  in  which  the  policy  of  selling  at  the  market  is 
general  is  the  steel  business  in  normal  times.  The  small 
independent  manufacturer  accepts  the  market  price  of 
a  given  steel  product  as  a  fixed  condition,  sells  his 
"share"  of  the  total  output,  and  depends  upon  holding 
down  his  plant  costs  to  maintain  his  profits. 

In  general,  if  the  merchant  producer  adopts  the  policy 
of  selling  at  the  market,  he  must  differentiate  his  prod- 
uct from  that  of  his  competitors  and  then  build  up  a 
particular  demand  for  it.  To  do  this  he  must  employ 
the  same  means  he  would  use  to  establish  the  product  as 

244 


PRICE  POLICIES 

a  distinct  commodity  upon  a  higher  price  level.  Trade- 
marks and  trade  names,  coupled  with  added  utiHty, 
niceties  of  finish,  evenness  of  quality,  or  more  conven- 
ient packages,  serve  at  the  basis  for  an  increased  de- 
mand for  the  commodity  upon  the  same  price  level  as 
substantially  identical  products.  And  in  selling  at  the 
market,  superior  promptness  in  delivery  may  become 
a  factor  of  great  importance  in  increasing  sales. 

Recent  developments  in  the  textile  industry  illus- 
trate the  adoption  of  the  policy  of  selling  at  the  market, 
combined  with  an  attempt  to  increase  sales  at  the 
market  price  by  a  differentiation  of  the  product.  Ap- 
parently the  textile  manufacturers  who  are  branding 
their  goods  do  not  seek  to  establish  a  new  price  level  for 
their  product.  Instead  they  aim  to  increase  their  sales 
by  building  up  a  demand  for  their  commodity  in  com- 
petition with  the  product  of  other  manufacturers  at  the 
prevailing  price  level. 

Chart  IV  is  a  graphic  representation  of  one  phase  of 
this  policy.  It  brings  out  the  idea  that  new  consumers 
may  be  drawn  into  the  market  at  an  existing  price  level 
by  giving  the  differentiated  commodity  an  added  im- 
portance in  the  eyes  of  the  consumer.  To  revert  to  the 
economist's  terminology  again,  a  higher  subjective  val- 
uation is  placed  upon  the  commodity  by  the  consumer. 
Its  importance  to  him  increases.  Though  at  prevailing 
prices  his  subjective  ratio  of  exchange  is  too  low  to  per- 
mit purchasing  the  stock  commodity,  he  may  purchase 
the  differentiated  commodity  at  the  same  price  because 
of  a  greater  subjective  valuation  which  he  places  upon 
it.  And  this  greater  subjective  valuation  may  be  due 
to  the  prestige  of  a  well-known  trade-mark  or  to  the 
greater  convenience  or  service  of  an  improved  pack- 

245 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

age,  such  as  the  air-tight  cartons  in  which  cereal  prod- 
ucts are  distributed. 

SelHng  at  the  market  plus  is  perhaps  the  most  char- 
acteristic price  policy  of  modern  distribution.   In  recent 


X 

a 

j/                                                      Selling  at  the  Market 

I             !               ■           'M 

1                1 
1                1 
■              1 

O 

c              C                                              Y 

Chart  IV 

This  is  an  attempt  to  show  graphically  the  effect  of  a  stimulation  of  increased  demand  for 
a  commodity  without  any  increase  in  the  price  at  which  it  is  marketed. 

The  ordinate,  ox,  is  a  scale  of  increasing  price.  The  abscissa,  oy,  shows  the  number  of  pur- 
chasers. The  arc  LM  indicates  the  number  of  purchasers  at  any  given  price,  growing  less  as 
the  price  is  increased  and  greater  as  the  price  is  decreased. 

If  the  established  market  price  is  represented  by  oa,  the  number  of  purchasers  at  that  price 
will  be  represented  by  oc.  If  then  by  stimulating  an  increased  demand  for  his  product,  the 
merchant-producer  is  able  to  increase  proportionally  the  number  of  purchasers  at  each  price 
level,  the  demand  curve  LM  will  be  replaced  by  L'M',  and  at  the  price,  oa,  a  greater  number 
of  purchasers,  oc',  will  purchase. 

This  chart  does  not,  of  course,  show  how  customers  already  in  the  market  are  drawn  from 
other  merchant-producers  to  the  purchase  of  a  differentiated  product  for  which  a  demand  is 
stimulated  at  the  same  price  level  as  the  products  of  the  other  merchant-producers. 


years  the  effort  among  progressive  manufacturers  has 
been  not  alone  to  anticipate  unformulated  human  wants 
and  create  new  products  to  satisfy  them,  but  to  improve 
staple  commodities  and  develop  new  psychic  values  and 
utilities  in  them.  The  limit  set  by  a  common  market 
price  for  commodities  of  the  kind  and  class  which  they 
manufacture  has  been  rejected.  They  find  opportuni- 
ties of  demand  creation  and  profit  in  the  difference  be- 
tween this  established  market  price  and  the  varying 

^6 


PRICE  POLICIES 

subjective  valuation  placed  upon  their  commodities  by 
consumers  of  different  purchasing  power  and  different 
social  positions  and  personal  habits. 

The  economists  tell  us  the  "consumer's  surplus"  is 
the  difference  between  the  market  value  of  a  commodity 
and  the  subjective  value  of  the  commodity  to  the  user.^ 
Each  individual  sets  up  for  himself  a  ratio  of  exchange 
between  commodities  which  finds  expression  in  the  price 
he  would  be  willing  to  pay  for  any  one  of  them  rather 
than  go  without  it.  These  subjective  valuations  con- 
stitute the  demand  side  of  the  market. 

The  interplay  of  supply  and  demand  gives  rise  in  a 
competitive  market  to  a  market  price  at  which  the  con- 
sumer can  obtain  the  commodity.  If  this  market  price 
is  above  that  fixed  by  the  subjective  ratio  of  exchange 
of  the  consumer,  he  drops  out  of  the  market,  utilizing 
his  purchasing  power  to  secure  other  commodities. 
But  if  the  market  price  is  below  that  which  the  con- 
sumer would  be  willing  to  pay  to  obtain  the  commodity, 
he  purchases;  and  the  difference  between  his  subjec- 
tive ratio  of  exchange  and  the  objective  market  ratio  of 
exchange  constitutes  his  "consumer's  surplus."  The 
man  of  means,  for  example,  who  buys  his  morning  paper 
for  a  cent,  would  still  purchase  it  if  the  price  were  fixed 
at  five  cents,  at  ten  cents,  or  possibly  more.  Somewhere 
in  the  ascending  scale  a  point  would  be  reached  at  which 
even  the  man  of  means  would  drop  out  of  the  market. 
But  long  before  that  point  was  reached,  less  well-to-do 
readers  would  have  ceased  to  purchase  the  paper.  And 
the  difference  between  the  price  at  which  the  well-to-do 
man  would  drop  out  of  the  market  and  the  market  price 

1  See  F.  W.  Taussig,  "  Principles  of  Economics,"  Vol.  I,  page  128  and 
following. 

!W7 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

of  one  cent  which  he  actually  pays  represents  his  per- 
sonal "consumer's  surplus." 

The  more  able  distributors  turn,  though  usually  un- 
consciously, to  the  existence  of  this  margin  as  the  basis 
of  a  demand  for  what  is  to  all  intents  and  purposes  a  new 
commodity.  That  is,  they  differentiate  a  product  from 
a  staple  commodity  for  which  a  market  price  has  been 
established  and  establish  an  effective  demand  for  the 
modified  product  upon  a  new  price  level,  higher  than 
that  established  for  the  commodity  of  which  it  is  a 
modification. 

The  means  used  for  differentiation  are  more  numerous 
and  more  effective  than  those  employed  when  the  price 
policy  adopted  is  selling  at  the  market  par,  since  the 
margin  available  for  the  differentiation  is  larger  and  the 
potential  gain  greater.  Sometimes  slight  modifications 
are  enough  to  render  it  better  adapted  to  the  use  to 
which  it  is  put.  Sometimes  niceties  of  trimming  and 
equipment  are  sufficient.  Sometimes  a  new  and  more 
convenient  style  of  package  is  used.  Sometimes  the 
distributor  builds  up  an  atmosphere  of  good  taste  about 
the  goods  or  a  reputation  for  constant  quality  which 
insures  the  consumer  against  dissatisfaction.  Some- 
times the  distributor  depends  upon  "service"  or  special 
conveniences  to  the  consumer  provided  as  collateral  to 
the  commodity.  Always,  however,  the  aim  is  to  isolate 
his  product  from  the  stock  commodity  of  substantially 
like  nature.  And  nearly  always  the  distributor  utilizes 
trade-marks  or  trade  names  to  identify  his  product  as  a 
distinct  commodity  and  to  make  sure  of  the  repeat 
order  when  the  purchaser  enters  the  market  again. 

He  must  then  convey  knowledge  of  his  differentiated 
product  to  those  consumers  whose  subjective  ratio  of 

£48 


PRICE  POLICIES 

exchange  would  have  led  them  to  pay  a  higher  price  for 
the  stock  commodity  before  transferring  their  demand 
to  other  goods.  By  calling  attention  to  the  superior 
qualities,  or  convenience,  or  constant  reliability  of  his 


^L' 


Selling  at  the  Market  Pius 


rf  \ 

;' -«- 

"^ M 

Chart  V 

This  chart  illustrates  the  effect  of  the  price  policy  termed  "selling  at  the  market  plus." 
On  the  ordinate  ox  is  laid  off  a  scale  of  prices  for  a  staple  commodity.  The  abscissa  oy  shows 
the  number  of  purchasers. 

The  demand  curve  LM  indicates  the  number  of  purchasers  at  a  given  price,  growing  less 
as  the  price  increases  and  greater  as  the  price  decreases.  Then  if  oa  represents  the  market 
price  of  the  staple  commodity,  oc  will  represent  the  number  of  purchasers.  Now  if  the 
merchant-producer  differentiates  his  product  from  the  staple  commodity,  and  stimulates  a 
demand  for  it,  the  effect  is  to  increase  the  number  of  possible  purchasers  at  each  price  level. 
Thus  the  demand  curve  LM  is  replaced  by  the  demand  curve  L'M'. 

Obviously  the  merchant-producer  may  dispose  of  the  differentiated  product  at  a  price  oa', 
higher  than  the  price  oa,  without  reducing  the  number  of  purchasers,  oc.  In  other  words,  he 
can  profit  by  the  increased  demand  through  raising  his  price  rather  than  by  increasing  his 
sales. 

differentiated  product,  he  transfers  to  it  a  portion  of  the 
demand  that  formerly  found  expression  in  the  purchase 
of  the  stock  commodity.  How  this  altered  demand 
develops  is  indicated  graphically  in  Chart  V. 

The  marketing  of  hats  furnishes  an  illustration  of  this 
development.  If  derby  hats  were  distributed  as  a 
staple,  unbranded  and  at  a  single  market  price  for  a 
given  quality,  many  consumers  would  pay  $3  for  a  staple 
hat  whose  individual  ratio  of  exchange  would  render 

249 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

them  willing  to  pay  more  than  $3  for  a  hat  rather  than 
go  without.  But  certain  producers  have  distinguished 
their  hats  from  the  staple  kinds  by  their  brands.  By 
calling  attention  to  niceties  of  trimming  and  finish 
and  by  emphasis  upon  the  correctness  of  their  styles 
some  of  them  have  built  up  a  demand  for  their  hats 
at  $5. 

These  trade-marked  hats  and  the  staple  hats  selling 
at  $3  are  substantially  the  same  commodity,  but  are 
differentiated  by  detail  modifications.  These  detail 
differences  render  the  well-to-do  consumer  willing  to 
pay  a  higher  price  for  the  trade-marked  hat.  No  doubt 
the  demand  for  the  more  expensive  hat  depends  in  part 
upon  the  consumer's  feeling  of  security  that  his  hat  will 
be  of  good  quality  and  of  proper  shape  if  it  bears  the 
name  of  a  producer  who  has  built  up  this  market  pres- 
tige. This  feeling  of  security  forms  a  part  of  the  sub- 
jective valuation  placed  upon  the  hat.  No  doubt,  too, 
motives  of  emulation  sometimes  enter  in,  and  the  con- 
sumer derives  part  of  his  gratification  from  the  mere  fact 
that  he  purchases  a  hat  which  is  known  to  sell  at  a 
higher  price  than  those  purchased  by  his  less  well-to-do 
neighbors. 

It  is  of  interest  to  note  that  other  manufacturers  of 
branded  hats  have  in  recent  years  fixed  their  prices  at 
$4  and  $6,  appealing  to  consumers  upon  different  price 
levels  from  those  reached  by  prior  distributors  of  trade- 
marked  hats.  Thus  they  reach  with  a  $4  hat  a  group  of 
consumers  not  available  to  the  distributors  of  $5  hats 
because  their  subjective  ratios  of  exchange  did  not  ren- 
der them  willing  to  pay  $5  for  a  hat.  And  with  a  $6  hat 
they  draw  from  the  distributors  of  $5  hats  certain  of  the 
consumers  whose  subjective  valuation  of  a  hat  renders 

250 


PRICE  POLICIES 

them  willing  to  pay  more  than  $5  for  one  that  pleases 
them. 

The  policy  of  selling  at  the  market  plus  makes  the 
most  severe  demands  on  the  ability  of  the  distributor. 
To  succeed  he  must  have  an  unusual  equipment,  in- 
cluding knowledge  of  human  nature,  of  the  psychologi- 
cal reactions  of  the  individual  consumer,  and  must  be 
able  to  give  proper  weight  to  such  motives  as  social  emu- 
lation and  all  the  varied  factors  that  enter  into  the  con- 
sumer's subjective  ratio  of  exchange. 

The  process  resulting  from  the  increasing  adoption  of 
this  price  policy  and  the  increasing  differentiation  of 
commodities  at  various  price  ranges  is  closely  analogous 
to  the  creation  of  new  commodities.  When  the  hat 
trade  splits  up  into  a  number  of  individual  brands,  prac- 
tically distinct  commodities  at  diflFerent  price  levels, 
the  situation  from  a  social  point  of  view  is  little  dif- 
ferent from  that  arising  from  the  creation  of  new  com- 
modities which  are  not  merely  modifications  of  existing 
commodities. 

If  the  safety  razor  be  regarded  as  a  new  commodity 
rather  than  as  a  modification  of  the  old-stj'le  razor,  it 
provides  us  with  an  opportunity  to  test  the  social  justi- 
fication for  the  creation  of  a  new  commodity.  When  the 
first  widely  advertised  safety  razor  was  put  upon  the 
market  at  $5  a  considerable  margin  of  profit  was  left 
to  the  producer.  It  was  said  at  the  time  that  the  ac- 
tual cost  of  manufacture  was  less  than  $1.  Now  this 
wide  margin  of  profit  made  possible  an  extensive  adver- 
tising campaign  which  brought  the  new  device  to  the 
attention  of  the  entire  consuming  public.  Everyone, 
whether  in  the  large  centers  or  remote  districts,  learned 
of  the  safety  razor  and  its  uses.    Great  numbers  pm-- 

251 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

chased  the  razor  because  the  subjective  valuation  which 
they  placed  on  the  new  commodity  exceeded  the  price 
asked.  The  large  reward  received  by  the  distributor  may 
properly  be  regarded  as  compensation  for  bringing 
about  a  better  adjustment  to  meet  human  needs. 

To-day  the  safety-razor  demand  is  well  established, 
and  those  consumers  whose  individual  ratios  of  exchange 
do  not  render  them  willing  to  pay  $5  for  a  safety  ra- 
zor are  able  to  gratify  their  conscious  need  by  a  choice 
of  many  similar  products  at  prices  ranging  as  low  as 
twenty-five  cents.  It  is  an  interesting  problem  for  the 
producer  whether,  in  view  of  the  enormous  demand  for 
blades,  the  initial  price  of  $5  might  not  well  have  been 
reduced  in  later  years  and  selling  eflFort  concentrated 
on  the  production  and  distribution  of  blades.  Every 
extra  razor  sold  would  mean  the  creation  of  an  added 
and  more  or  less  permanent  demand  for  blades.  This 
is  the  sales  policy  followed  in  marketing  many  office 
and  factory  appliances;  the  initial  price  of  the  device 
is  little  more  than  its  delivered  cost  and  the  profits 
come  from  the  sale  of  supplies  necessary  to  its  op- 
eration. 

Now  when  the  producer  of  a  commodity  already  mar- 
keted by  other  producers  sets  off  his  commodity  from 
others  of  like  kind,  and  sometimes  even  by  minor  im- 
provements is  enabled  to  build  up  a  demand  for  it  on  a 
higher  price  level  than  that  of  the  stock  commodity,  he 
has  made  a  more  accurate  adjustment  in  supplying 
human  wants  and  has  brought  the  possibility  of  this 
more  accurate  adjustment  to  the  attention  of  consumers. 
The  purchaser  of  a  trade-marked  hat  at  $5  would  buy  a 
staple  hat  for  $8  if  the  $5  hat  did  not  give  him  equal  or 
greater  proportional  gratification,  taking  into  account 

252 


PRICE  POLICIES 

the  differing  objective  ratio  of  exchange.  Obviously, 
the  consumer  who  buys  a  trade-marked  hat  does  so  be- 
cause he  prefers  to  pay  $5  for  such  a  hat  rather  than  $3 
for  an  unbranded  hat,  and  to  criticise  the  payment  of  the 
additional  $2  for  the  differentiated  product  because  the 
modifications  are  not  substantial  is  to  attempt  to  sub- 
stitute for  the  subjective  valuation  of  the  consumer  as 
a  basis  of  exchange  an  external  social  standard.  The 
more  highly  differentiated  the  scale  of  commodities  is, 
the  more  accurately  will  it  be  possible  for  the  individual 
consumer  to  satisfy  his  material  wants. 

For  true  value  is  not  objective,  but  subjective.  The 
practical  basis  of  exchange  is  the  extent  to  which  the 
article  will  satisfy  the  desire  of  the  purchaser.  The 
price  you  can  secure  depends  on  the  intensity  of  this 
desire,  not  on  the  material  value  of  the  finished  product, 
such  as  its  calories  of  food  value  or  its  wearing  quali- 
ties. The  problem,  then,  is  to  intensify  the  demand  for 
your  goods,  to  add  to  the  material  value  a  psychic  value 
in  the  gratification  the  customer  experiences  in  its  color, 
flavor,  design,  or  style. 

The  manufacturer  who  is  successful  in  establishing  a 
differentiated  product  as  a  distinct  commodity  on  a  new 
price  level  is,  for  a  time,  in  the  position  of  having  a  mo- 
nopoly as  to  the  differentiated  commodity.  Such  com- 
petition as  he  has  is  the  indirect  competition  of  the 
similar  staple.  His  position  often  enables  him  to  obtain 
temporarily  a  margin  of  profit  out  of  all  proportion  to 
the  cost  of  the  actual  improvements  in  the  differen- 
tiated product.  This,  again,  may  be  justified  as  a  re- 
ward for  turning  the  resources  of  nature  to  the  better 
satisfaction  of  human  wants.  As  advertising  is  the 
price  we  pay  for  instruction  in  better  methods  of  satis- 

253 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

fying  our  wants,  so  this  is  the  price  we  pay  for  the  inven- 
tion of  better  methods.  Of  course,  if  the  poHcy  of  sell- 
ing at  the  market  plus  results  in  a  higher  price  on  a 
staple  necessity  for  the  marginal  consumer,  it  goes  be- 
yond all  justification.  But  this,  I  believe,  will  rarely 
if  ever  happen.  In  the  main,  the  policy  affects  only  the 
specialties.  And  even  from  these  the  large  percentage 
of  profit  will  decrease  as  other  producers,  observing 
the  pioneer's  gains  and  following  his  example,  differ- 
entiate their  products  from  the  original  staple  in  the 
same  or  in  different  ways.  This  rise  of  competition  at 
the  new  price  level  and  the  premium  put  on  features 
which  make  selling  points  will  tend  to  force  in  the  dif- 
ferentiated commodities  the  substantial  improvements 
in  quantity,  quality,  or  service  warranted  by  the 
higher  price. 


254 


CHAPTER  XVI 

ORGANIZATION  OF  DEMAND  CREATION 
COMBINATION  OF  AGENCIES 

rr^HE  fundamental  purpose  in  demand  creation  is  ef- 
-*-  fective  transmission  of  ideas  about  the  goods  to 
prospective  buyers  at  the  lowest  unit  cost.  Analysis  of 
the  market  will  locate  these  probable  customers.  A  wise 
price  policy  will  establish  a  balance  between  the  widest 
practicable  distribution  and  maximum  profit.  Labora- 
tory tests  of  the  materials  of  demand  creation  will  de- 
termine which  selling  points  have  strongest  appeal  and 
the  quantity  and  sequence  in  which  they  are  most  con- 
vincing. Similar  studies  and  "try-outs"  will  show  the 
relative  efficiency  of  the  middleman,  the  direct  sales 
force,  and  the  various  kinds  of  advertising  in  communi- 
cating ideas  to  possible  purchasers.  And  a  survey  of 
the  considerations  involved  in  the  location,  construc- 
tion, and  equipment  of  the  sales  plant  will  show  how 
best  to  turn  these  factors  to  the  main  purpose. 

All  these  activities  are  preliminary.  They  produce 
results  only  when  the  agencies  of  demand  creation  are 
set  in  motion.  Before  this  can  be  done,  or  at  least  be- 
fore the  forces  of  distribution  find  equilibrium  of  great- 
est profit,  one  further  problem  must  be  solved  —  what 
combination  of  agencies  is  to  be  used  to  reach  the  mar- 
ket and  what  part  of  the  work  of  demand  creation  is  to 
be  performed  by  each. 

There  are  manj^  marketing  situations,  to  be  sure, 
where  a  single  agency  of  demand  creation  is  adequate. 

i55 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

If  stress  is  put  upon  the  combinations  of  two  or  more,  it 
is  because  relatively  few  business  men  recognize  to  what 
extent  this  is  a  possible  problem  for  them.  The  major- 
ity still  gamble  on  their  business  instinct  and  experi- 
ence; and  the  success  or  failure  of  the  campaign  is  the 
only  evidence  they  have  whether  these  were  or  were  not 
safe  guides.  If  their  previous  experience  has  indicated 
that  advertising  or  a  direct  sales  force  is  an  efficient 
agency  of  demand  creation,  they  are  likely  to  adopt  it 
for  distributing  the  new  product  although  the  latter 
may  be  quite  different  in  character.  If  they  make  any 
studied  comparison  of  the  various  agencies,  it  is  prob- 
ably on  the  basis  of  average  cost  of  selling,  without  any 
serious  attempt  to  analyze  the  market  from  the  view- 
point of  its  accessibility  to  each  agency  or  to  consider 
each  agency  from  the  angle  of  its  ability  to  transmit  the 
particular  kind  of  ideas  about  the  goods  involved. 

In  fact  the  business  man  too  seldom  realizes  how  in- 
tricate is  the  problem  of  determining  the  agency  or  the 
combination  of  agencies  which  is  exactly  adapted  to 
reach  the  various  geographic  or  social  and  economic 
strata  of  his  market.  Too  often  he  adopts  one  method 
and  becomes  an  advocate  of  it,  disregarding  other  meth- 
ods entirely  or  taking  them  up  in  a  perfunctory  way. 
While  it  is  true  that  the  method  adopted  may  be  more 
efficient  than  any  other  single  method,  for  his  particular 
work  of  demand  creation  the  solution  of  the  problem 
by  no  means  stops  here.  For  the  agency  which  is  rela- 
tively efficient  in  reaching  one  geographic  area  may  be 
inferior  to  another  method  in  reaching  another  area. 
And  a  system  of  distribution  which  has  proved  effective 
in  reaching  buyers  on  one  economic  level  may  be  com- 
paratively ineffective  when  employed  to  reach  another. 

256 


COMBINATION  OF  AGENCIES 

The  problem  of  finding  the  most  effective  combination 
of  agencies,  then,  is  most  complicated.  Each  distinct 
area  and  economic  and  social  group  must  be  treated  as 
a  separate  unit  for  study  and  analysis. 

The  manager  selling  through  salesmen  ordinarily 
finds  a  decreased  selling  cost  as  he  increases  his  sales 
within  his  immediate  territory.  But  as  he  widens  his 
market,  the  selling  cost  usually  increases. 

Here  a  combination  of  salesmen  and  direct  advertising 
may  cut  his  cost  of  demand  creation.  He  may,  for  in- 
stance, reduce  the  number  of  salesmen's  visits  by  one 
half  and  either  prepare  the  way  for  them  or  supplement 
their  efforts  by  a  series  of  "follow-up"  letters  or  by  per- 
sonal correspondence.  In  areas  more  distant  or  with  a 
widely  scattered  population,  it  may  be  profitable  or  even 
necessary  to  eliminate  the  salesmen  entirely.  Selling  by 
mail  through  direct  advertising  may  be  the  most  effec- 
tive method,  cost  considered.  The  important  thing  al- 
ways is  that  no  one  agency  should  be  adopted  to  the 
exclusion  of  all  others  merely  because  its  use  has  proved 
profitable  in  previous  ventures.  There  may  be  sections 
where  it  is  positively  unprofitable  and  where  it  can  be 
supplemented  or  entirely  supplanted  by  other  methods 
of  demand  creation. 

The  method  of  sale  is  a  factor  of  importance  in  the 
problem  of  agency  selection.  If  sale  is  in  bulk,  the 
purchaser  seeing  the  actual  goods  before  buying,  dis- 
tribution through  a  series  of  middlemen  is  generally 
most  feasible.  In  such  a  situation  expense  ordinarily 
prohibits  direct  handling.  Only  in  exceptional  cases, 
where,  for  example,  small  household  appliances  are  sold 
by  door-to-door  canvass,  is  the  handling  of  the  product 
by  exclusive  salesmen  practicable.    Sale  in  bulk  is  also 

257 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

possible  by  either  direct  or  general  advertising,  where 
the  size  and  nature  of  the  product  permit  its  sale  and 
shipment  on  approval  or  subject  to  trial  by  the  pur- 
chaser. 

If  sale  by  sample  is  the  method  best  adapted  to  the 
commodity  in  question,  middlemen  or  direct  salesmen 
are  likely  to  be  the  most  eflBcient  agencies  of  demand 
creation.  Such  commodities,  indeed,  are  distributed 
through  both  middlemen  and  direct  salesmen,  the  sale 
at  each  stage  being  by  sample  until  the  final  movement 
from  retailer  to  consumer,  when  the  sale  becomes  one 
of  bulk.  Direct  salesmen  in  the  majority  of  cases  sell 
from  sample.  And  even  demand  creation  by  direct  ad- 
vertising is  in  some  cases  practically  sale  by  sample. 
For  the  distributor  by  mail  of  a  commodity  which  is  not 
bulky  may  send  for  inspection  and  test  a  sample  of  the 
commodity  with  his  direct  advertising. 

Where  sale  by  description  is  used  exclusively,  direct 
or  general  advertising  is  likely  to  be  the  most  effective 
agency.  Increasing  knowledge  and  skill  on  the  part  of 
advertising  managers,  writers,  and  illustrators,  coupled 
with  recent  advances  in  the  mechanical  processes  of 
reproduction  and  printing,  have  enlarged  the  scope  and 
effectiveness  of  advertisements  until  they  seem  alone  an 
adequate  and  economical  means  of  demand  creation  for 
a  multitude  of  commodities  and  staple  specialties.  The 
establishment  of  a  domestic  parcel  post  equipped  to 
convey  twenty -pound  packages  to  any  part  of  the  coun- 
try and  to  make  collections  on  delivery  has  added  fur-: 
ther  effectiveness  to  advertising  by  providing  a  cheap, 
popular,  and  universal  agency  for  the  supply  of  goods 
which  have  been  marketed  by  printed  and  written 
symbols. 

258 


COMBINATION  OF  AGENCIES 

It  is  possible,  though  generally  not  economical,  to  dis- 
tribute a  commodity  through  a  series  of  middlemen,  the 
sale  at  each  stage  being  accomplished  by  description. 
And  the  use  of  salesmen  in  selling  by  description  is  very 
common.  Take  the  cases  where  furniture,  heavj'  ma- 
chinery, hardware,  and  like  commodities  are  sold  from 
photographs,  from  catalogs,  and  more  recently  through 
the  use  of  moving  pictures. 

The  extent  to  which  any  one  agency  of  demand  crea- 
tion can  be  used  must  not  be  decided  alone,  however, 
on  theoretical  grounds.  In  many  cases  the  middleman 
is  already  strongly  intrenched  and  the  whole  business 
structure  is  based  upon  his  activities.  His  relations  with 
his  customers  are  long  established,  his  retention  of  many 
of  his  traditional  functions,  such  as  financing  operations, 
sharing  the  risk,  and  even  transporting  the  goods, 
clinches  his  hold  on  his  trade  territory  and  makes  him  a 
necessary  factor  in  reaching  the  dealers  or  consumers 
he  serves. 

Choice  of  the  agency  for  demand  creation  also  reacts 
upon  the  materials  of  demand  creation  (ideas  about  the 
goods)  and  upon  the  goods  themselves.  Under  the  or- 
thodox type  of  distribution,  the  basis  of  the  sale  to  the 
middleman  is  his  opportunity  to  dispose  of  the  goods 
at  a  profit.  Because  of  this  emphasis  on  price  and  sala- 
bility,  the  tendency  of  the  orthodox  system  in  market- 
ing unbranded  commodities  is  to  turn  the  energies  of 
the  producer  toward  lowering  the  cost  of  production 
and  reducing  the  price.  The  influence  of  satisfaction  or 
dissatisfaction  on  the  part  of  the  consumer  comes  to  him 
only  indirectly  through  a  chain  of  middlemen.  jMore- 
over  where  the  goods  are  not  differentiated  by  trade- 
mark or  trade  name,  their  identity  is  often  completely 

^9 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

lost  in  the  successive  stages  of  distribution.  Even  the 
retailer  in  many  communities  and  neighborhoods  con- 
cerns himself  rather  with  salability  than  with  ultimate 
satisfaction  to  the  customer.  And  if  the  customer  is 
not  perfectly  satisfied  and  accepts  the  product  only  be- 
cause it  is  the  best  he  can  get,  his  objections  must  or- 
dinarily be  relayed  through  two  or  more  middlemen 
before  they  can  reach  the  producer. 

Only  marked  defects  in  quality,  therefore,  are  likely 
to  be  brought  to  the  attention  of  the  producer.  Thus 
he  fails  to  establish  that  touch  with  consumers  which 
would  guide  him  toward  improvements  in  quality  and 
service  in  his  goods.  Since  his  attention  is  not  directed 
primarily  to  those  elements,  leakage  of  demand  is  likely 
to  result.  He  is  not  manufacturing  the  precise  com- 
modity which  the  market  desires  and  would  buy  with 
the  least  outlay  of  money  and  energy  for  demand 
creation. 

The  differentiated,  trade-marked  product,  on  the 
other  hand,  encounters  a  barrier  to  a  wider  market  in 
the  fact  that  it  competes  for  the  middleman's  interest 
and  selling  effort  directly  with  the  latter's  own  "house 
brands"  and  with  articles  of  lesser  quality  or  prestige 
which  allow  him  a  greater  unit  margin  of  gain.  Few 
wholesalers  consider  themselves  established  with  their 
trade  until  they  control  several  lines  marketed  under  a 
firm  name  or  symbol.  Nor  is  the  "house  brand"  any 
longer  the  exclusive  possession  of  the  jobber.  The  larger 
retail  stores  feature  many  trade-marked  "staple  special- 
ties" of  their  own,  if  the  phrase  "staple  specialties"  is 
permissible  to  describe  commodities  only  slightly  dif- 
ferentiated from  the  standard  market  types. 

The  "house  brand"  may  be  regarded  as  a  logical 

360 


COMBINATION  OF  AGENCIES 

outcome  of  current  conditions  in  distribution,  of  suc- 
cessful attempts  by  manufacturers  to  market  advertised 
products  through  the  regular  channels  of  the  trade. 
The  wholesaler,  arguing  that  his  salesmen  do  an  indis- 
pensable part  of  the  actual  work  of  demand  creation, 
carrying  knowledge  and  samples  of  scores  of  lines  into 
remote  villages  which  few  single  manufacturers  could 
afiFord  to  cultivate,  sees  no  ethical  or  practical  obstacle 
in  the  way  of  bringing  out  similar  articles  under  his  own 
name  and  pushing  these  instead  of  the  manufacturer's 
advertised  brands. 

From  the  viewpoint  of  the  jobber  and  the  retailer 
alike,  the  advertised  product  presents  an  element  of 
danger  in  that  its  sale  cannot  be  controlled.  After  con- 
tributing what  seems  to  him  an  important  factor  in  the 
creation  of  demand  and  the  securing  of  general  distribu- 
tion for  such  articles,  the  wholesaler  may  see  his  dis- 
count cut;  and  the  retailer  may  be  compelled  either  to 
accept  an  increased  sales  quota  or  to  give  up  a  line  which 
has  become  identified  with  his  store  through  his  adver- 
tising and  through  selling  talks  with  his  customers. 
The  "big  stick"  policy  in  handling  the  trade  is  so  recent 
in  the  memories  of  many  middlemen  that  it  still  colors 
their  attitude  toward  those  newly  advertised  products 
and  advertising  manufacturers  whose  reputations  for 
fair  treatment  of  their  distributors  have  not  been  sub- 
jected to  decisive  tests. 

It  is  only  a  nationally  exploited  line  of  clothing  or 
shoes,  for  instance,  which  can  secure  mention  of  its 
individual  trade-mark  in  the  advertising  of  certain  im- 
portant stores  necessary  to  its  distribution  scheme  in 
the  larger  cities.  The  policy  generally  adopted  by  these 
stores  in  connection  with  advertised  articles  not  ex- 

S61 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

clusively  controlled  is  to  stock  and  supply  them  when 
called  for,  but  to  give  every  display  advantage  to  their 
private  brands  and  to  offer  these  when  the  customer 
does  not  request  a  specific  product.  This  is  certainly 
fair  merchandising  —  presuming  that  the  house  brands 
are  the  equals  of  the  trade-marked  specialties  in  quality 
and  service.  Yet  the  manufacturer  who  has  blazed  the 
way  in  a  particular  field  may  properly  feel  that  such 
practice  deprives  him  of  some  of  the  fruits  of  his  cam- 
paign of  demand  creation. 

The  opposition  of  middlemen  to  any  reduction  of  their 
margin  is  general  enough  to  present  a  serious  problem  to 
the  producer.  Often  the  latter  postpones  taking  over 
the  function  of  communicating  ideas  about  his  goods 
directly  to  the  user  because  he  sees  that  he  must  con- 
tinue to  pay  the  middleman  for  that  work,  whether  or 
not  it  is  performed  by  him,  or  else  develop  independent 
agencies  of  physical  supply.  The  latter  step  involves, 
of  course,  the  outlay  of  considerable  capital  for  the  es- 
tablishment of  branch  warehouses  and  organizations  or 
of  branch  retail  stores  in  such  centers  of  population  as 
promise  suflicient  volume  of  potential  sales. 

On  the  other  hand,  retailers  in  certain  fields  have  been 
educated,  through  observation  or  demonstration  of  the 
effect  of  advertising  on  sales,  to  acceptance  of  a  lowered 
margin  or  trade-marked  goods  in  exchange  for  repeated 
campaigns  of  demand  creation.  This  may  be  witnessed, 
for  example,  in  clothing,  or  more  recently  in  shoes,  where 
national  exploitation  of  one  trade-marked  line  has  given 
it  an  exclusive  agent  in  almost  every  town  of  importance 
in  which  the  company  does  not  maintain  a  branch  store. 
In  other  lines,  producers  have  found  it  advantageous  to 
undertake  the  wholesaler's   work  of  physical   supply 

262 


COMBINATION  OF  AGENCIES 

rather  than  compensate  him  for  a  selhng  function  no 
longer  performed. 

In  directly  assuming  the  burden  of  demand  creation 
the  manufacturer  has  choice  of  two  agencies,  an  ex- 
clusive sales  force  and  general  or  direct  advertising. 
Since  their  function  is  the  same,  the  transmitting  of 
ideas  about  the  goods  not  only  to  the  ultimate  users  but 
also  to  such  middlemen  as  it  may  be  advantageous  to 
employ  in  distribution,  the  analogy  between  them  is  very 
close.  In  many  fields  they  may  be  used  as  substitutes, 
one  for  the  other;  yet  each  retains  its  zones  of  special 
utility  and  both  reach  their  highest  efficiency,  as  a  rule, 
when  they  supplement  one  another  in  the  work  of 
demand  creation.  It  is  a  significant  fact,  in  this  connec- 
tion, that  some  of  the  largest  mail-order  houses,  com- 
mitted to  a  policy  of  direct  advertising,  have  found 
it  profitable  in  certain  districts  to  employ  salesmen  to 
take  orders  for  their  merchandise. 

The  combination  of  sales  force  and  advertising  is  often 
advantageous  because  the  personal  equation  of  the  in- 
dividual "prospect"  is  an  unknown  quantity  in  demand 
creation.  You  may  discover  and  standardize  and  record 
a  thousand  selling  points  about  your  product.  From 
this  material  you  may  construct  a  sales  argument  whicli 
is  logical  and  decisive,  and  then  reduce  it  to  a  written 
or  printed  form  which  disarms  criticism  and  defies  bet- 
terment. The  special  and  exclusive  virtue  of  advertis- 
ing, indeed,  is  that  it  allows  you  to  transmit  to  the 
reader  exactly  those  ideas  you  wish  to  convey  in  the 
exact  form  that  seems  best  for  their  transmission.  But 
unless  you  are  intimately  acquainted  with  every  possi- 
ble customer  you  address  and  are  able  to  adapt  your 
selling  talk,  your  pictures,  your  diagrams,  to  his  wnme- 

263 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

diate  state  of  mind,  your  standard  argument  will  shoot 
wide  much  oftener  than  it  hits  the  mark.  If  your  circle 
of  prospective  users  is  broad  enough,  you  can  content 
yourself  with  this  average  result.  If  the  range  of  your 
product  is  narrow,  you  must  find  some  way  to  adapt 
both  approach  and  selling  talk  to  the  attitude  and  sit- 
uation of  the  individual  buyer. 

Adaptability  is  the  salesman's  strength,  just  as  ac- 
curacy in  the  transmission  of  ideas  is  a  dependable 
quality  of  advertising.  The  average  business  man,  as 
an  individual  prospect,  does  not  exist.  His  moods,  his 
interest  in  proposals  not  plainly  relevant  to  the  task 
he  happens  to  have  in  hand  change  with  the  passing 
hours.  The  approach  or  selling  talk  which  would  merely 
rouse  impatience  at  a  time  when  he  is  absorbed  in  a 
problem  might  secure  quick  recognition  and  interest 
when  that  problem  is  disposed  of. 

But  advertising  cannot  choose  the  moment  of  its  ap- 
proach except  in  a  very  limited  or  a  very  general  way. 
If  direct  or  local,  for  example,  it  can  avoid  Monday 
mornings  and  the  crest  of  "rush"  seasons  like  the  weeks 
before  Christmas  and  Easter  in  retail  stores.  If  general, 
it  can  choose  its  mediums  with  the  aim  of  presenting 
ideas  at  the  time  or  in  the  place  where  the  prospect  is 
most  likely  to  entertain  them  and  it  can  concentrate  on 
the  seasons  when  buying  is  general.  But  all  advertising 
lacks  the  salesman's  ability  to  sense  immediate  condi- 
tions which  may  be  either  propitious  or  adverse  and  to 
base  action  on  what  is  thus  perceived. 

The  same  capacity  in  a  seasoned  man  allows  him  to 
feel  out  the  prospect's  attitude  toward  the  product  or 
service  he  represents  and  to  shape  his  talk  so  that  he 
can  avoid  touching  convictions   or  prejudices   which 

S64 


COMBINATION  OF  AGENCIES 

might  interfere  with  the  sale.  Moreover  he  can  discover 
the  objections  which  occur  to  the  prospect  as  he  con- 
siders purchasing.  By  meeting  them  he  can  turn  them 
into  buying  arguments;  at  the  least  he  can  take  them 
away  with  him  for  further  study  and  future  answer. 
Any  specialty  salesman  of  experience  will  agree  that  he 
cannot  forecast  the  workings  of  a  new  prospect's  mind 
or  determine  beforehand  just  what  objections  will 
emerge.  Where  advertising  stakes  all  its  chances  on 
finding  the  average  buyer  in  an  average  mood,  the 
salesman  can  bring  as  much  intelligence,  tact,  and  skill 
as  he  possesses  to  the  problem  of  avoiding  the  unfavor- 
able occasion  and  inducing  a  receptive  attitude  toward 
what  he  has  to  offer. 

Once  the  prospect's  attention  is  engaged,  the  sales- 
man has  the  appeal  of  personal  presence  to  give  warmth 
and  color  to  his  assembly  of  facts  and  figures.  For 
personality  still  has  much  to  do  with  the  transactions 
of  business.  Few  products  have  an  actual  monopoly 
of  value  or  utility;  the  enthusiasm  or  tact  or  resource 
of  the  salesman  frequently  is  the  decisive  factor  in  in- 
fluencing the  purchase.  There  is  more  than  one  in- 
stance on  record  where  a  sales  force  which  had  analyzed 
and  developed  to  the  full  the  consumer  uses  of  an  in- 
ferior product  has  held  the  market  against  a  better 
article  until  the  factory  experimental  rooms,  working 
night  and  day,  could  match  the  merits  of  the  competing 
product. 

In  the  distribution  of  many  staple  specialties  like 
furniture,  shoes,  dry  goods,  and  the  like,  the  assurance 
of  a  straightforward,  competent,  and  likeable  salesman 
that  the  "goods  are  right"  often  carries  greater  weight 
with  the  retailer  than  the  guarantee  of  the  house  behind 

265 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

them.  So  true  is  this  that  within  their  territories  many 
travehng  men  are  virtually  in  business  on  their  own  ac- 
count; by  grace  of  long  acquaintance  and  fair  and 
friendly  dealing  they  have  acquired  a  hold  on  their  trade 
which  it  is  no  easy  matter  to  overcome.  Recognition  of 
this  fact  has  prompted  many  intensive  advertising  cam- 
paigns to  establish  a  direct  contact  with  dealers  or  con- 
sumers and  emphasize  the  house  rather  than  the  sales- 
man as  the  responsible  force  behind  the  merchandise. 

Because  of  his  personal  contact  and  adaptability,  the 
salesman  can  also  build  a  convincing  argument  from  ma- 
terials which  advertising  would  present  much  less  ef- 
fectively. He  can  stage  his  sale.  If  a  sample  of  the 
product  is  the  key  argument  (it  usually  is  in  the  case  of 
a  specialty),  he  can  introduce  it  at  the  exact  moment 
when  the  other  man  is  prepared  to  concentrate  upon  it. 
If  it  is  a  machine  of  any  sort,  he  can  demonstrate  those 
functions  which  would  be  of  importance  in  the  prospect's 
business.  Better  yet,  he  can  lead  the  latter  to  operate 
the  thing  himself  and  thus  come  a  step  nearer  to  under- 
standing and  accepting  it.  If  it  is  a  new  fabric,  an 
unfamiliar  food  product,  a  differentiated  garment  or 
line  of  garments,  he  can  analyze  it  from  the  standpoint 
of  the  individual  he  is  addressing  and  shape  his  sales 
talk  to  drive  home  its  advantages  either  for  direct  use 
or  for  resale  to  consumers. 

More  important  still,  when  the  salesman  has  created 
a  demand  for  his  goods  he  is  at  hand  to  close  the  order 
immediately.  Experience  or  intuition  tells  him  when 
this  moment  comes,  and  his  will  power  goes  into  the 
balance  to  overcome  the  buyer's  inertia,  his  tendency 
to  put  off  decisions  when  decision  means  paying  out 
money.    So  generally  is  this  negative,  defensive  motive 

266 


COMBINATION  OF  AGENCIES 

recognized  that  sales  managers  urge  on  their  men  at  all 
times  the  supreme  importance  of  closing  the  order.  To 
overcome  this  inertia  when  advertising  is  the  agency 
used,  the  demand  created  must  be  much  more  impera- 
tive. There  is  no  salesman  at  hand  to  seize  the  propi- 
tious moment,  and  some  positive  action  must  therefore 
be  suggested  to  the  prospect,  the  signing  of  an  inquiry 
card,  telephoning  the  local  agent,  or  telling  him  of  a 
store  where  the  goods  can  be  secured. 

The  direct  sales  force  and  producer  advertising,  then, 
are  different  agencies  for  accomplishing  the  same  end. 
This  is  to  transmit,  or  to  secure  the  transmission  of, 
ideas  about  the  goods  to  the  prospective  buyer's  mind 
more  directly  and  more  accurately  than  the  orthodox 
chain  of  middlemen  will  transmit  them. 

The  character  of  his  product  may  permit  a  manufac- 
turer to  send  his  salesman  or  his  advertising  direct  to 
the  ultimate  user  and  to  make  direct  deliveries  by  ex- 
press, freight,  or  parcel  post,  or  through  his  own  branch 
houses  or  stores.  Again,  distribution  through  retailers 
may  be  the  only  method  possible,  and  the  nearest  his 
salesmen  can  come  to  influencing  the  prospective  con- 
sumer is  to  teach  dealers  and  their  clerks  its  outstanding 
selling  points  and  to  train  them  to  use  and  demonstrate 
these  intelligently.  Here  he  can  supplement  this  in- 
direct contact  with  advertising  aimed  at  the  consumer, 
the  dealer,  and  the  clerk.  Or,  needing  both  the  whole- 
saler and  retailer  for  physical  supply  of  his  tooth  paste, 
gloves,  watches,  breakfast  food,  or  whatever  his  product 
is,  he  may  put  the  burden  of  demand  creation  on  ad- 
vertising, backing  it  up  with  introductory  or  supple- 
mentary campaigns  of  sampling  and  demonstration  to 
prospective  users. 

267 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

In  comparing  salesmen  with  different  forms  of  ad- 
vertising, the  business  man  often  judges  both  agencies 
upon  the  direct  returns  over  a  short  period.  This  does 
not  take  account  of  all  three  classes  of  demand  aroused 
by  selling  effort  —  expressed  conscious  demand,  unex- 
pressed conscious  demand,  and  subconscious  demand. 
The  direct  and  immediate  return  from  selling  efforts  de- 
pends solely  on  expressed  conscious  demand.  But  the 
business  man  must  consider  the  unexpressed  conscious 
demand  and  the  subconscious  demand.  Take  the  case 
of  an  advertised  collar.  A  man  notices  the  advertise- 
ment, reads  it,  and  decides  that  at  some  future  time  he 
will  try  it.  Months  later  perhaps  he  does  so.  His 
purchase  is  not  reflected  in  the  immediate  returns,  yet 
clearly  it  is  a  result  to  be  reckoned  with  in  any  compar- 
ison. Or  suppose  the  man  merely  notices  the  adver- 
tisement. At  a  later  date,  when  purchasing  collars,  he 
is  shown  the  advertised  brand  along  with  another.  The 
brand  being  vaguely  familiar  from  the  advertisement, 
he  purchases  it  in  preference  to  the  others.  Here,  too, 
the  aroused  demand  is  of  a  degree  not  reflected  in  imme- 
diate returns,  yet  it  is  of  value  to  the  distributor. 

It  is  obvious,  then,  that  in  balancing  the  advantages 
of  selling  through  salesmen  against  selling  through  ad- 
vertising in  whole  or  part,  the  business  man  must  con- 
sider not  only  the  demand  reflected  in  the  direct  imme- 
diate returns  alone  but  also  the  lesser  degrees  of  demand 
which,  while  not  immediately  effective,  bring  later  re- 
sults and  contribute  to  make  demand  continuous. 

Thus  a  salesman  might  make  fifty  calls  at  an  expense 
of  $100,  and  ten  sales  might  result  from  his  efforts.  Or 
for  the  same  $100,  5,000  pieces  of  direct  advertising 
could  be  mailed,  resulting  perhaps  in  only  eight  sales. 


COMBINATION  OF  AGENCIES 

Or,  again,  if  the  same  $100  were  used  in  the  insertion 
of  a  page  advertisement,  in  100,000  of  the  circulation 
of  a  standard  magazine,  only  six  would  result.  Now  it 
is  apparent  that,  judging  by  the  direct  results,  the 
salesman  is  the  most  efficient  agency  of  distribution, 
the  direct  advertising  next,  and  the  magazine  adver- 
tising least  efficient.  But  the  manager  will  bear  in  mind 
that,  while  the  salesman  made  ten  sales,  he  had  only 
.  forty  opportunities  to  create  the  lesser  grades  of  de- 
mand. The  direct  advertising  gave  4.992  opportunities 
for  the  creation  of  demand  falling  short  of  immediate 
expression,  and  the  magazine  advertising,  perhaps, 
49,994  such  opportunities,  assuming  that  one  person 
saw  the  advertisement  in  half  the  copies  printed  —  not 
an  improbable  assumption  since  each  copy  of  a  maga- 
zine is  usually  read  by  several  persons. 

Aside  from  furnishing  a  basis  for  laboratory  tests  of 
ideas,  direct  advertising,  especially  the  written  com- 
munication, has  certain  distinct  advantages.  It  is  pos- 
sible to  convey  the  exact  shade  of  meaning,  in  detail  and 
elaboration.  The  letter  writer  has  absolute  supervision 
over  the  written  symbols  he  is  using.  Style,  substance, 
manner  of  presentation  are  under  his  direct  control. 
He  can  balance  the  time  devoted  to  description  and 
argument  on  the  one  hand  against  the  time  devoted  to 
the  anticipation  of  objections  on  the  other.  He  can 
present  his  exact  proposition,  avoiding  misrepresen- 
tation or  misunderstanding.  He  can  be  courteous  or 
olunt,  ceremonious  or  informal,  conservative  or  forcible, 
as  the  occasion  may  require. 

The  advantages  and  limitations  of  direct  advertising 
cannot,  of  course,  be  reduced  to  direct  measurement. 
Yet  direct  advertising,  general  advertising,  and  the  use 

269 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

of  salesmen  can  be  measured  on  the  basis  of  a  common 
unit  —  cost,  as  measured  in  the  effectiveness  of  calls. 
Say,  for  example,  that  the  cost  for  100  calls  by  the  sales- 
man is  $100,  the  cost  for  100  letters  is  $3.35,  and  the 
cost  for  1,000  readers  of  a  page  advertisement  in  a 
magazine  is  $1.  A  hundred  dollars  in  the  first  case 
reaches  100  prospective  customers,  in  the  second  case 
3,000,  in  the  third  case  100,000.  Which  method  pro- 
duces the  most  orders  on  a  given  expenditure.'^  That  is 
the  test. 

A  sound  selling  policy,  then,  must  be  built  up  on  a 
careful  analysis  of  the  market  by  areas  and  strata  and 
upon  a  detailed  study  or  the  proper  agency  or  combina- 
tion of  interrelated  agencies  to  reach  each  area  and 
stratum.  The  economic  generalizations  expressed  in 
the  law  of  diminishing  returns  must  be  recognized.  A 
sound  selling  policy,  furthermore,  must  weigh  not  only 
the  direct  results  obtained  from  the  use  of  one  or  the 
other  agency  over  a  short  period,  but  also  the  less 
measurable  results  represented  by  the  unexpressed  con- 
scious demand  and  subconscious  demand  which  go  to 
aid  the  selling  campaign  of  the  future.  And  at  every 
point  the  elusive  human  element  is  present  and  cannot 
be  left  out  of  the  account. 

In  any  study  of  the  agencies  of  demand  creation  the 
drift  toward  a  shortened  cycle  of  distribution  presents 
one  of  the  most  interesting  developments  in  modern 
business.  It  is  significant  of  broad  changes  and  read- 
justment in  our  market  machinery  and  it  is  also  a  factor 
to  be  carefully  considered  by  the  producer  in  selecting 
his  agencies  of  demand  creation. 

Starting  with  the  manufacturer's  assumption  of  va- 
rious functions  performed  by  the  middleman,  it  has 

270 


COMBINATION  OF  AGENCIES 

brought  about  a  counter  movement  with  the  same  end 
among  both  wholesalers  and  retailers.  On  the  one  side, 
many  manufacturers  of  shoes,  clothing,  and  silverware 
(to  mention  only  the  most  typical  lines)  have  virtually 
eliminated  the  wholesaler,  selling  direct  to  the  retailer. 
Many  others  have  dropped  all  middlemen  and  deal  with 
the  consumer  in  person,  either  by  the  mail-order  route, 
by  exclusive  stores,  or  by  special  salesmen. 

To  compensate  for  this  loss  in  potential  volume,  the 
natural  growth  of  the  country  keeping  up  his  accus- 
tomed average  of  sales,  the  wholesaler  in  his  turn  has 
developed  his  super-profitable  "house  brands"  and  re- 
duced the  chain  by  one  member,  turning  manufacturer 
himself.  And  even  here  there  is  divergence  in  method. 
Of  two  great  merchandising  houses  in  Chicago,  one  has 
adopted  the  policy  of  ownership  of  many  important 
sources  of  supply,  while  the  other  follows  the  radically 
different  course  of  control  of  many  small  producers 
by  furnishing  them  with  working  capital,  patterns  or 
style  suggestions,  and  a  market  for  their  total  output, 
thus  allowing  them  to  go  back  to  the  original  function 
of  the  manufacturer  and  concentrate  on  production 
problems  alone.  The  large  retailer,  therefore,  has  short- 
cut distribution  as  effectively  as  the  advertising  manu- 
facturer, by  owning  or  controlling  sources  for  several 
of  his  principal  lines.  The  sum  of  these  parallel  move- 
ments has  been  in  the  direction  of  simplification  and 
economy  for  a  relatively  small  but  significant  section  of 
business. 

Out  of  the  antagonistic  yet  concurrent  efforts  of  the 
producer,  the  wholesaler,  and  the  retailer  to  simplify 
distribution  by  elimination  will  probably  come  a  class 
of  eflBcient,  broad-gauged  middlemen  (already  indicated 

271 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

by  the  rise  of  such  individuals  in  every  field)  who  will 
recognize  that  each  function  in  distribution  is  best  per- 
formed by  its  appropriate  agency  and  will  cooperate 
with  the  producer  in  getting  rid  of  duplicate  effort  and 
in  securing  the  greatest  number  of  turnovers  per  dol- 
lar of  capital  and  expense.  The  integration  of  trade 
and  industry  can  be  effected  by  the  coordination  of 
functions  and  individual  efforts.  It  is  not  dependent 
on  the  concentration  of  ownership  and  control. 


«72 


SECTION  n 
PHYSICAL  SUPPLY 


CHAPTER  XVII 

PLANT  AND  OPERATION  POLICIES 

"pHYSICAL  supply  of  the  goods  is  the  final  step  in 
-*-  distribution,  supplementing  the  work  of  demand 
creation  and  making  it  effective  by  putting  the  product 
in  the  consumer's  hands.  Through  the  various  agen- 
cies developed  for  the  purpose,  it  applies  further  mo- 
tion to  the  material  already  changed  in  form  by  the 
activities  of  production.  In  this  application  of  motion 
to  change  the  place  of  the  transformed  material,  demand 
creation  may  seem  to  have  the  more  important  part. 
But  both  are  necessary  to  bring  about  the  new  place 
and  ownership  utilities  which  are  the  essence  of  selling; 
and  both  are  so  interdependent  in  their  relations  that 
policies  and  methods  cannot  be  fixed  for  one  without 
keeping  in  mind  their  influence  on  the  operations  of  the 
other. 

The  problem  of  physical  supply  can  be  simply  stated. 
How  shall  the  maximum  of  aroused  demand  be  satisfied, 
with  minimum  demand  leakage  and  least  expense,  pres- 
ent and  future  sales  both  being  considered?  Time, 
convenience,  and  service  are  the  three  things  the  pro- 
spective buyer  looks  to;  the  producer's  task  is  to  provide 
the  goods  when  they  are  wanted,  where  they  are  wanted, 
and  in  the  condition  and  volume  which  the  market  at 
the  moment  requires. 

Minimum  leakage  of  demand  is  one  of  the  main  con- 
siderations. Aroused  demand  is  not  only  a  useless  thing, 

275 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

but  is  actually  detrimental  unless  the  product  can  be 
delivered  before  the  edge  of  curiosity  and  desire  is  dulled. 
The  woman  who  asks  her  grocer  for  a  new  naphtha  soap, 
whose  lasting  qualities  she  has  seen  advertised  weekly  or 
monthly,  will  soon  lose  patience  and  interest  in  the 
quest  if  the  grocer  assures  her  that  he  cannot  find  it  in 
the  market.  If  she  trusts  her  grocer  —  and  no  manu- 
facturer can  ignore  the  fact  that  customer  confidence  is 
the  solid  basis  of  retail  trading  —  she  will  accept  his 
statement  and  dismiss  the  claims  of  the  new  soap,  par- 
ticularly if  inquiries  at  other  stores  show  that  they  also 
have  not  stocked  it.  From  expressed  conscious  demand, 
she  drops  down  the  scale  of  interest  to  the  zero  level ; 
and  disappointment  induces  a  negative  attitude  which 
must  be  overcome  before  the  process  of  demand  creation 
can  be  begun  again. 

If  the  product  is  suflSciently  differentiated  from  the 
staple  offerings,  like,  for  example,  a  naphtha  soap  which 
will  not  dissolve  too  rapidly  in  hot  water,  appeals  to  the 
economy  motive  may  renew  her  desire  to  make  a  trial 
purchase.  But  for  a  commodity  only  slightly  differ- 
entiated from  the  standard,  an  initial  breakdown  in 
physical  supply  like  this  forms  a  serious  hindrance  to 
distribution.  There  is  lost  ground  to  be  regained;  the 
materials  of  demand  creation  lack  their  first  fresh  ap- 
peal; and  the  prospect's  experience  has  made  her  skep- 
tical of  the  manufacturer's  promises  of  service. 

It  is  true  that  consumers'  requests  are  the  best  evi- 
dence of  aroused  demand,  and  that  middlemen  generally 
require  some  such  evidence  before  they  will  purchase 
a  specialty  competing  with  an  item  already  in  stock. 
Hence  a  delay,  and  thus  a  dilemma  for  the  producer. 
It  is,  indeed,  a  serious  problem  so  to  coordinate  the 

«76 


PLANT  AND  OPERATION  POLICIES 

demand-creation  campaign  and  the  plan  for  putting 
the  goods  within  reach  of  prospective  buyers  that  the 
interval  between  the  expression  of  aroused  demand  and 
the  delivery  of  the  product  shall  be  as  short  as  possible. 
The  ideal,  of  course,  is  immediate  delivery;  and  there 
are  practicable  ways  of  attaining  this  ideal  or  of  dis- 
counting the  effect  of  the  delay  on  the  prospective  buyer. 
We  shall  say  more  about  them  a  little  later. 

The  point  to  be  emphasized  at  the  outset  is  that  the 
leakage  of  demand  due  to  defective  physical  supply 
puts  a  heavy  tax  on  the  operations  of  distribution.  How 
great  this  waste  is  cannot  be  estimated  with  any  degree 
of  accuracy;  but  it  is  fair  to  say  that  a  large  proportion 
of  unsuccessful  advertising  campaigns  have  failed  be- 
cause provision  was  not  made  for  physical  supply  of  the 
goods  on  a  scale  as  broad  as  the  advertising  plan.  Leak- 
age of  demand  resulted  because  the  vital  principle  of 
balance  was  not  observed. 

While  sales  were  made  in  bulk,  and  in  the  many  cases 
where  they  are  still  made  in  bulk,  the  problem  of  phys- 
ical supply,  as  distinct  from  demand  creation,  cannot 
arise.  Delivery  is  made  at  the  time  of  purchase;  de- 
mand creation  and  physical  supply  are  coincident.  But 
where  sale  by  description  or  sale  by  sample  is  employed, 
a  demand  is  created  which  is  effective  only  if  the  goods 
can  be  made  readily  available  to  the  prospect.  If  a  con- 
siderable expenditure  of  energy  is  required  of  the  cus- 
tomer or  if  there  is  a  considerable  lapse  in  time  before 
the  demand  created  is  satisfied,  a  large  share  of  the 
aroused  demand  will  be  lost.  Time  and  convenience  are 
thus  essential  elements.  If  any  rule  is  to  be  formulated 
it  is  that  there  must  be  the  least  possible  interval 
between  exciting  demand  and  satisfying  it.    Demand 

«77 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

creation  without  effective  physical  distribution  repre- 
sents pure  waste. 

Approaching  his  problem  of  physical  supply,  the  man- 
ufacturer finds  that  its  activities  break  up,  as  in  produc- 
tion and  demand  creation,  into  two  main  groups.  There 
are  plant  policies,  having  to  do  with  the  location,  con- 
struction, and  equipment  of  his  warehouses  and  their 
attendant  shipping  facilities;  and  there  are  operating 
policies  which  govern  the  problems  of  materials,  agen- 
cies, and  organization.  The  classification  is  indeed 
more  obvious  here  than  in  demand  creation  for  the 
reason  that  the  factors  dealt  with  once  more  are  tan- 
gible and  measurable  things. 

The  materials,  for  example,  are  the  goods  themselves. 
The  agencies  are  either:  (1)  functional  middlemen  in 
the  transportation  field,  railroads,  express  companies, 
and  the  parcel  post;  (2)  areal  middlemen,  wholesalers 
and  retailers;  or  (3)  agencies  of  direct  supply,  branch 
houses,  and  exclusive  agents  or  retail  stores.  Supple- 
menting the  agency  of  transportation  are  the  pro- 
ducer's own  delivery  facilities  for  transportation  of  the 
goods  for  part  or  all  of  the  way  from  the  main  plant  or 
branch  house  to  the  place  where  the  consumer  comes  in 
contact  with  them.  To  the  traditional  groups  of  areal 
middlemen  also  might  be  added  the  special  types  more 
recently  evolved,  such  as  wholesale  and  retail  catalog 
houses,  buying  associations  of  dealers  and  consumers, 
chain  stores,  and  warehousing  and  delivery  concerns. 

It  appears  at  a  glance  that  here  are  three  distinct 
economic  functions :  (1)  transporting  the  goods  to  create 
place  utility,  (2)  storing  the  goods  to  create  time  util- 
ity, and  (3)  physical  transfer  of  the  goods  to  create 
ownership  or  possession  utility.    The  problem  of  phys- 

278 


PLANT  AND  OPERATION  POLICIES 

ical  supply  is  complex  because  the  agencies  which  the 
manufacturer  must  use  are  not  aligned  according  to 
these  economic  functions  but  have  developed  along 
trade  and  sectional  lines  as  well  as  those  of  convenience 
and  individual  initiative. 

To  get  relatively  wide  distribution  at  minimum  cost 
he  may  require  only  the  middlemen  of  the  orthodox 
system.  To  supply  the  largest  possible  percentage  of 
aroused  demand  without  leakage  and  with  reasonable 
expense,  however,  he  may  be  obliged  to  use  several 
agencies  to  reach  different  economic  or  geographic 
groups  of  consumers.  The  sacrifice  of  an  economical 
method  of  demand  creation  may  be  necessary  in  order 
to  insure  thorough  physical  distribution  of  the  product. 
Or,  on  the  other  hand,  the  upbuilding  of  an  exclusive 
organization  of  supply  agencies  may  be  required  to 
take  advantage  of  the  demand-creation  plan  on  which 
the  success  of  the  business  depends. 

It  is  the  existence  of  these  problems,  the  difficulty  of 
establishing  a  balance  between  the  opposing  require- 
ments of  demand  creation  and  physical  supply  and  of 
maintaining  this  balance  in  the  face  of  changing  con- 
ditions, that  give  the  business  man  his  function  and 
opportunity  and  justify  his,  at  times,  exaggerated 
gains.  In  my  view  of  things,  the  man  who  effects  a 
new  and  more  economical  combination  of  forces  in 
production  or  distribution  is  entitled  to  the  savings  he 
effects  until  such  time,  at  least,  as  competition  has 
learned  to  utilize  or  match  his  discovery. 

Society  must  pay  for  its  short  cuts,  either  in  market 
rewards  to  individual  innovators  or  in  public  appropri- 
ations for  the  study  and  recommendation  of  the  most 
eflBcient  processes  by  which  it  is  fed  and  clothed  and 

279 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

housed.  The  latter  would  be  the  simplest,  most  direct, 
and  most  economical  method  of  arriving  at  results  which 
thousands  of  business  men  are  attempting  to  approach 
by  roundabout,  detail  ways.  This  would  not  involve 
the  quenching  of  individual  incentive  and  the  initiative 
which  springs  from  it,  by  the  socializing  of  our  machin- 
ery of  production  and  distribution.  Instead,  by  more 
speedily  standardizing  the  conditions,  methods,  mate- 
rials, and  processes  on  which  all  business  men  must 
concentrate  until  they  have  been  standardized,  organ- 
ized national  investigation  of  these  common  factors  of 
business  would  so  much  the  sooner  release  for  creative 
purposes  the  enormous  funds  of  capital  and  human 
energy  now  dissipated  in  unproductive  motions. 

From  the  consumer's  standpoint,  service  is  the  key 
to  physical  supply.  A  commodity  is  of  dominant  value 
to  him  only  when  and  where  it  will  satisfy  some  material 
or  psychic  want.  Its  appeal  decreases  in  proportion  to 
its  lack  of  time  and  place  utility.  The  problem  of  the 
producer  is  to  anticipate  the  consumer's  need,  to  bring 
the  product  within  easy  reach  at  the  moment  the  de- 
mand develops  and  to  keep  on  bringing  fresh  units  to  the 
point  of  contact  as  long  as  the  demand  continues.  The 
location,  construction,  and  equipment  of  the  supply 
plant,  therefore,  are  essential  considerations,  governed  in 
the  main  by  policies  analogous  to  those  which  apply  to 
similar  problems  in  production  and  demand  creation. 
In  discussing  the  other  policies,  indeed,  many  of  the 
factors  which  count  in  physical  supply  were  anticipated, 
by  reason  of  the  mutual  interdependence  of  the  three 
groups  of  activities. 

It  is  enough,  then,  to  suggest  the  main  elements  in 
location.   Accessibility  to  the  market  is  obviously  the 

^0 


PLANT  AND  OPERATION  POLICIES 

first  of  these,  with  emphasis  on  transportation  facilities 
and  charges.  If  sale  is  by  sample  or  by  description, 
the  warehouses  may  be  placed  with  an  eye  single  to  serv- 
ice, remote  from  both  sales  offices  and  factory  if  speed 
in  delivery  is  thereby  increased.  This  is  one  of  the  two 
motives  for  branch  warehouses  at  strategic  points,  the 
other  being  the  savings  made  in  freights  on  carloads  to 
these  market  centers  and  package  shipments  in  the  trib- 
utary zone.  The  advertising  value  of  stock  rooms 
adjacent  to  the  sales  department  is  a  negligible  quan- 
tity, now  that  the  motor  car  has  put  the  downtown 
office  within  easy  reach  of  the  warehouse  district. 

Except  in  the  case  of  machinery  and  other  heavy 
products  where  the  customer  may  wish  to  inspect  the 
actual  unit  to  be  delivered,  bulk  sales  by  the  manufac- 
turer involve  no  special  plant  problems  in  physical 
supply.  The  retail  store  in  fact  remains  the  one  agency 
in  distribution  where  sales  in  bulk  retain  their  impor- 
tance. Even  here,  in  the  larger  cities,  the  desire  to  secure 
a  selling  location  in  the  high-rent  zone  has  separated 
the  salesroom  from  the  stock  room  and  made  selling  by 
sample  common  in  furniture,  grocery,  and  department 
stores.  In  groceries,  perhaps,  this  advance  is  most  typ- 
ical of  the  new  viewpoint  and  new  spirit  of  analysis 
that  are  making  themselves  felt  in  business. 

Speed  and  economy  of  handling  likewise  dictate  the 
policies  of  construction  and  equipment.  The  character 
of  the  goods,  the  building  standards,  the  material  re- 
sources of  the  locality,  and  the  amount  of  capital  avail- 
able are  the  factors  which  the  manager  has  to  consider. 
In  a  business  of  any  size,  he  has  the  technical  knowledge 
of  his  works  executives  to  draw  upon  and  can  safely 
leave  to  them  the  detail  execution  of  the  policies  de- 

281 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

termined  with  their  aid.  Lacking  such  counsel,  the 
head  of  a  small  business  is  still  able  to  secure  specific  in- 
formation on  every  phase  of  construction  and  equip- 
ment from  outside  specialists  or  from  authoritative 
books  and  articles  in  trade  and  technical  periodicals. 

The  small  business  has  its  compensations  in  that  it  is 
usually  compact,  and  handling  operations  can  be  kept 
under  the  personal  control  of  the  manager.  Its  internal 
transportation  and  storage  problems  are  too  simple  to 
require  elaborate  mechanical  conveyors,  tiering  ma- 
chines, electric  "mules,"  overhead  trolleys,  and  other 
labor-saving  devices  to  keep  costs  on  a  reasonable  plane. 
Its  outside  transportation  is  an  equally  simple  matter. 
If  the  product  is  bulky,  a  switch  track  serving  both  the 
receiving  and  dispatching  platforms  and  connecting  with 
the  local  railroads  is  the  sum  of  requirements.  For  val- 
uable small  products,  goods  made  of  delicate  materials, 
or  articles  shipped  in  small  lots,  the  advantages  of  a 
switch  track  would  be  next  to  nothing.  The  problem  of 
outside  transportation  was  considered  at  some  length, 
however,  in  an  earlier  section  of  this  volume  in  the  chap- 
ter on  factory  location.  It  will  suffice  here  to  repeat 
that  the  character  and  speed  of  the  service  required  to 
insure  deliveries  on  the  customer's  terms  is  the  main 
factor,  though  the  cost  of  providing  for  such  service 
balanced  against  the  financial  situation  of  the  business 
may  postpone  adoption  of  the  most  desirable  policy. 

In  his  choice  of  agencies  for  physical  distribution,  the 
manufacturer  encounters  certain  limitations.  The  na- 
ture of  the  product,  its  unit  price,  and  the  buying  habits 
of  consumers  may  indicate  the  middleman  as  the  most 
efiFective  and  economical  means  of  supply.  For  staples, 
this  is  a  matter  of  course,  since  the  work  of  demand 

282 


PLANT  AND  OPERATION  POLICIES 

creation  is  largely  in  his  hands;  but  this  agent  serves 
also  for  branded  foods  and  trade-marked  specialties  in 
dry  goods,  women's  wear,  notions,  hardware,  furniture, 
toilet  and  medicinal  preparations,  men's  clothing  and 
furnishings,  and  many  other  lines  of  semi-staple  neces- 
sities and  luxuries  which  lend  themselves  to  this  method 
of  physical  supply,  even  when  the  middleman  is  not  the 
chief  agent  of  demand  creation. 

At  the  same  time,  every  one  of  these  lines  furnishes 
numerous  instances  of  physical  distribution  without  the 
aid  of  the  middleman,  the  producer  assuming  all  the 
work  of  supply  save  actual  transportation.  The  retail 
catalog  houses  have  blazed  many  trails  in  this  par- 
ticular field,  but  their  experience  would  be  an  unsafe 
guide  to  the  manufacturer  of  a  single  product  or  a  lim- 
ited line.  Despite  their  control  of  production  sources, 
the  mail-order  concerns  must  rank  as  middlemen,  their 
exercise  of  the  important  middleman  function  of  assem- 
bling, storing,  and  assorting  many  kinds  of  commodities 
being  an  essential  element  in  their  success. 

In  analyzing  his  supply  problem,  the  manager  looks 
first  to  the  buying  habits  of  his  prospective  customers 
and  the  incentive  he  can  ofiPer  them  to  change,  if  a  change 
be  necessary  to  give  him  maximum  distribution  at  min- 
imum expense.  Does  his  product  fall  within  the  wide 
range  where  the  consumer  puts  convenience  first,  either 
because  the  amount  of  money  involved  is  small  and 
values  are  standardized  or  because  the  nature  of  the 
product  puts  a  premium  on  frequent  small  purchases 
close  at  home? 

It  would  be  a  doubtful  experiment,  for  example,  to 
attempt  to  distribute  a  new  brand  of  flaked  cereal  other- 
wise than  through  retail  stores.  The  custom  of  the  aver- 

283 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

age  housewife  is  to  order  factory-cooked  breakfast  foods 
from  her  grocer  in  small  quantities  to  insure  freshness 
and  original  jflavor.  To  overcome  this  fixed  habit  and 
the  belief  that  cooked  breakfast  foods  deteriorate  with 
age  would  probably  be  a  much  more  difficult  task  than 
to  divert  a  good  share  of  existing  demand  to  a  new  brand 
marketed  through  orthodox  channels.  The  money  in- 
centive that  could  be  offered  for  the  direct  purchase 
of  a  dozen  packages  at  one  time,  too,  would  be  lessened 
by  transportation  charges  out  of  all  proportion  to  the 
value  of  the  shipment. 

Admitting  that  this  is  an  extreme  example  of  "con- 
venience goods,"  there  is  nevertheless  a  great  number 
of  commodities  either  low  in  price  or  of  only  occasional 
use  which  must  be  placed  within  easy  reach  of  the  con- 
sumer at  the  moment  his  demand  takes  form  in  order  to 
achieve  adequate  sales.  The  stock  of  any  neighborhood 
dry  goods,  hardware,  drug,  or  grocery  store  will  furnish 
hundreds  of  such  articles,  many  of  them  trade-marked 
and  highly  differentiated  from  competing  products. 
Differentiation,  trade-marking,  and  vigorous  campaigns 
of  demand  creation  are  responsible,  indeed,  for  this  wide 
physical  distribution  and  for  the  consumer's  recollec- 
tion of  the  trade  name  or  brand  when  subconscious  de- 
mand for  the  article  is  turned  into  conscious  demand 
by  his  need  of  it  or  sight  of  it  displayed  in  a  store. 

Accentuate  this  differentiation  by  closer  adaptation 
to  the  consumer's  wants  and  keep  up  or  increase  the  sell- 
ing campaign,  and  the  subconscious  demand  for  time  and 
convenience  goods  can  be  transformed  into  conscious 
or  expressed  demand  to  satisfy  future  wants  or  wants 
suggested  by  the  advertising  as  immediate  or  impending. 

For  products  put  forward  in  this  manner,  the  retailer 

284 


PLANT  AND  OPERATION  POLICIES 

and  jobber  with  their  waiting  stocks  are  not  necessary 
agencies  of  physical  supply;  the  parcel  post  or  a  rail- 
road or  express  company  will  furnish  the  single  missing 
element  of  transportation.  It  is  primarily  a  question  of 
demand  creation.  If  your  ideas  about  the  goods  have 
sufficient  force  and  appeal  to  dominant  buying  motives, 
you  can  make  your  sale  entirely  by  description  and 
pay  a  transportation  middleman  for  delivering  the 
product. 

This  is  the  method  of  the  catalog  houses,  whether 
they  specialize  in  one  line  like  women's  garments  or 
attempt  to  cover  all  lines  of  merchandise.  Price  is  the 
basis  of  their  differentiation  of  products,  the  aim  being 
to  offer  each  customer  the  kitchen  apron  or  winter  hat 
which  comes  nearest  to  her  notion  of  what  she  wants  to 
pay.  Lowered  prices  and  large  assortments  are,  indeed, 
their  chief  materials  of  demand  creation.  Adopting  the 
policy  of  selling  at  the  market  minus,  they  adjust  their 
production  policies  to  their  price  scale,  ownership  or 
control  of  sources  making  them  in  this  respect  manu- 
facturers rather  than  merchants,  and  thus  observe  the 
principle  of  balance  and  the  principle  of  interdependence 
which  should  govern  in  all  the  activities  of  production 
and  distribution. 

An  interesting  sidelight  on  the  changes  taking  place 
in  distribution  is  the  successful  effort  of  many  manu- 
facturers seeking  maximum  distribution  in  the  larger 
cities  to  convert  their  trade-marked  specialties  into 
"convenience  goods."  Limited  in  their  downtown 
sales  by  the  tendency  of  the  big  stores  to  push  house 
brands  or  competing  products  with  wider  profit  mar- 
gins, they  have  turned  to  the  neighborhood  stores  as 
supplementary  outlets.    Kayser  gloves,  Arrow  collars, 

285 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

Community  silverware,  and  a  long  array  of  advertised 
products  are  recognized  by  consumers  as  the  same,  no 
matter  where  they  are  purchased.  Buying  them  close 
at  hand  when  they  are  needed  is  so  much  easier  than 
having  to  foresee  and  provide  for  future  wants  that  the 
time  and  place  utilities  thus  created  are  superior  to  the 
attraction  of  the  larger  assortments  downtown.  Not 
always,  to  be  sure,  but  often  enough  to  make  the  neigh- 
borhood store  an  increasingly  important  factor  in  sup- 
plying urban  demand.  The  tendency  is  accentuated  by 
the  local  retailer,  who  exploits  the  articles  in  the  neigh- 
borhood to  prove  that  his  stock  is  composed  of  standard 
merchandise. 

The  producer  who  is  tempted  to  break  away  from 
orthodox  channels  of  distribution  must  bear  in  mind 
also  that  any  scheme  of  direct  supply  involves  problems 
of  financing,  handling,  and  shipping  of  which  the  middle- 
man system  would  practically  relieve  him.  The  elimina- 
tion of  the  wholesaler  alone,  though  it  has  been  effected 
in  nearly  every  line  of  business  by  individuals  who 
deal  direct  with  their  retailers,  causes  a  transfer  of  cap- 
ital burden  which  might  neutralize  in  a  specific  case  all 
the  advantages  of  direct  supply.  The  conditions  and 
problems  set  up  in  the  packing  and  shipping  rooms,  in 
the  credit,  collection,  and  accounting  departments  are 
vastly  more  complex,  of  course,  in  a  business  having  one 
or  two  or  three  thousand  dealer  accounts  than  in  one 
which  seeks  its  market  through  fifteen  or  thirty  or  fifty 
wholesalers. 

The  manufacturer  who  deals  direct  usually  is  able  to 
place  his  line  with  one  of  the  best  retailers  in  each  lo- 
cality and  to  establish  close  relations  with  him.  If  his 
product  appeals  to  all  classes,  however,  this  sacrifices 

286 


PLANT  AND  OPERATION  POLICIES 

not  a  little  aroused  demand  which  might  be  supplied 
by  dealers  of  lesser  standing  to  whom  the  jobber,  by 
reason  of  his  nearness,  can  safely  extend  credit  and 
dispatch  orders,  in  combination  shipments,  which  would 
not  repay  the  producer's  handling  and  administration 
costs. 

In  seasonal  trades,  again,  manufacturing  policies  are 
greatly  simplified  by  distributing  through  the  middle- 
man. Instead  of  driving  machines  and  men  at  excessive 
speeds  during  the  actual  selling  period,  advance  sales 
to  jobbers  can  be  used  to  equalize  production,  thus 
increasing  eflBciency  and  reducing  unit  costs.  When 
the  wholesaler  is  not  able  to  finance  the  advance  deliv- 
eries himself,  these  can  be  made  the  basis  of  banking 
credit,  whereas  the  piling  up  of  large  quantities  of  unsold 
stock  at  the  factory  would  be  counted  by  bankers  a 
somewhat  speculative  undertaking  for  any  business  not 
long  established  and  without  abundant  working  capital. 

One  of  the  factors  not  to  be  overlooked  is  that  the 
middleman  in  a  great  many  lines  seems  solidly  estab- 
lished. His  adherents  claim  with  considerable  show  of 
authority  that  nearly  ninety  per  cent  of  the  output  of 
our  small  factories  is  distributed  through  the  jobber 
and  that  eighty  per  cent  of  the  products  turned  out  by 
our  larger  concerns  seek  consumers  through  his  hands. 
Despite  the  success  of  the  innovators  and  their  short 
cuts  to  the  consumer,  therefore,  the  individual  manager's 
supply  problem  does  not  hang  solely  on  the  elimination 
of  the  wholesaler  or  of  all  middlemen.  The  profitable 
approach  is  just  as  likely  to  be  that  of  utilizing  the  mid- 
dleman for  physical  distribution  and  cooperating  with 
him  in  the  performance  of  his  other  function  of  demand 
creation.   It  is  not  safe  to  ignore  his  control  of  the  im- 

287 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

mediate  market  for  a  multitude  of  commodities,  or  to 
overlook  the  fact  that,  if  he  is  not  already  distributing  a 
passable  substitute  for  your  product,  development  of 
demand  for  it  will  surely  bring  about  the  addition  of 
such  a  substitute  to  his  lines.  By  trying  to  eliminate 
him,  you  divide  your  market  and  make  necessary  a  more 
intensive  campaign  of  demand  creation  to  overcome  his 
competition. 

The  direct  agencies  of  physical  supply  hardly  require 
definition;  their  special  fields  and  functions  are  obvious. 
The  branch  house,  the  exclusive  agent,  and  the  manu- 
facturer's chain  store  are  all  instruments  to  the  same 
end;  they  aim  to  control  the  supply  function  at  every 
stage  and  insure  delivery  of  the  goods  to  the  ultimate 
user  in  perfect  condition  and  with  the  least  possible  loss 
of  time  and  convenience  utility.  The  net  result  is  min- 
imum leakage  of  aroused  demand. 

Branch  houses  and  chain  stores  are  the  concomitants 
of  sales  volume.  Either  the  aroused  demand  is  so  great 
that  the  facilities  of  local  middlemen  are  inadequate  to 
supply  it;  or  the  demand  is  of  such  character  that  it 
may  easily  be  diverted  to  other  products  by  the  middle- 
man; or  the  volume  of  sales  makes  it  profitable  to  take 
over  the  supply  function  as  an  auxiliary  business. 
Whatever  his  motive,  the  manufacturer  establishing 
branch  houses  or  chain  stores  must  realize  that  in  the 
first  case  he  is  multiplying  his  administration  problems 
and  in  the  latter  is  assuming  the  risks  and  attacking  the 
problems  of  a  new  and  radically  different  range  of  busi- 
ness activities. 

The  exclusive  agent  has  more  the  character  of  partner- 
middleman  operating  in  a  special  territory,  furnishing 
part  or  all  of  the  necessary  working  capital,  and  bound 

288 


PLANT  AND  OPERATION  POLICIES 

up  in  his  interests  with  the  interests  of  the  parent  con- 
cern. The  warehousing  concern,  on  the  other  hand,  usu- 
ally limits  itself  to  the  function  of  receiving  and  storing 
goods  at  some  strategic  market  center,  and  of  assorting, 
packing,  and  shipping  orders  in  accordance  with  in- 
structions from  the  producers  or  merchandisers  it  serves. 

As  in  demand  creation,  the  producer's  subtler  and 
more  important  problems  have  to  do  with  the  organiza- 
tion of  his  supply  system  —  the  choice  of  the  agencies 
to  be  used,  assignment  of  the  work  to  be  done  by  each, 
and  coordination  of  their  activities  to  cut  out  duplicate 
efforts  and  to  promote  economy  of  stocks,  reduce  hand- 
ling and  transportation  expense,  and  yet  provide  such 
service  as  will  conserve  the  maximum  of  aroused  de- 
mand. In  our  earlier  discussions  of  the  middleman's 
part  in  demand  creation,  enough  was  said  about  his 
function  as  a  supply  agency  to  indicate  his  capacities  in 
this  direction  and  the  situations  and  lines  in  which  he 
can  be  employed. 

The  average  manufacturer  takes  the  line  of  least  re- 
sistance or  solves  all  his  problem  of  supply  at  a  stroke. 
He  chooses  the  middleman  and  accepts  as  necessary  the 
limitations  which  the  choice  puts  on  his  business.  Or 
he  swings  to  the  other  extreme  and  decides  to  market  his 
product  by  mail  and  make  deliveries  through  the  parcel 
post  or  some  other  functional  middleman  of  transporta- 
tion. But  the  constructive  business  man  breaks  up  his 
supply  problem  into  several  unit  problems  and  proceeds 
to  solve  each  on  its  merits,  keeping  an  eye  meanwhile 
on  the  effect  of  the  solution  on  his  other  activities. 
Knowing  the  capacities  of  the  middleman  and  the  ad- 
vantages and  disadvantages  of  direct  systems  of  supply, 
he  analyzes  his  market  and  chooses  the  agency  which 

289 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

will  best  serve  each  physical  area  and  economic  level 
without  incurring  undue  expense  or  interfering  with 
demand  creation. 

One  well-known  maker  of  men's  and  women's  shoes, 
for  instance,  distributes  the  bulk  of  his  output  through 
a  chain  of  retail  stores  maintained  in  the  larger  cities.  In 
lesser  places,  he  avoids  the  internal  competition  between 
lines  in  the  usual  shoe  store  by  giving  the  agency  to  a 
high-grade  clothier  who  is  willing  to  put  in  a  shoe  de- 
partment, stocking  full  lines  of  the  advertised  men's  lines 
and  taking  special  orders  for  women's  shoes  until  de- 
mand has  developed.  Local  conditions  may  sometimes 
point  to  a  department  store  as  the  most  promising  dis- 
tributor; or  a  shoe  dealer's  control  of  the  town's  best 
trade  and  his  desire  to  identify  his  store  with  a  line  so 
well  advertised  may  dictate  his  selection  as  the  advan- 
tageous agency.  In  territory  served  by  neither  chain 
stores  nor  retail  agents,  mail  orders  are  accepted  and 
the  shoes  are  delivered  by  parcel  post.  Provision  for 
supplying  aroused  demand  is  thus  made  wherever  the 
manufacturer's  advertising  penetrates,  the  combination 
of  agencies  depending  on  an  analysis  of  local  require- 
ments or  opportunities  instead  of  a  hard-and-fast  policy 
of  dealer  representation  alone  or  of  direct  supply. 

This  typical  case  suggests  the  flexibility  of  plan  es- 
sential to  effective  distribution.  Neither  in  demand 
creation  nor  in  physical  supply  does  the  wise  manager 
attempt  to  solve  his  problem  as  a  whole  and  evolve  a 
standard  policy  applicable  to  all  the  economic  and  geo- 
graphic divisions  of  his  market.  Instead,  he  recognizes 
each  group  as  a  unit  requiring  individual  analysis,  call- 
ing, perhaps,  for  a  special  combination  of  supply  agen- 
cies, if  leakage  of  demand  is  to  be  avoided.   In  serving 

290 


PLANT  AND  OPERATION  POLICIES 

a  field  relatively  small  as  compared  with  the  national 
market,  he  will  encounter  widely  varying  conditions  in 
the  larger  centers  and  their  suburbs,  in  cities  having  a 
preponderant  industry  or  class  of  industries,  and  in 
towns  and  villages  on  which  agricultural  populations 
depend  for  their  merchandise  needs.  And  even  when 
he  has  classified  and  grouped  these  district  and  local 
markets,  he  will  find  case  after  case  where  the  person- 
ality, imagination,  or  selling  ability  of  a  single  merchant 
has  upset  all  the  conventions  of  trade  and  brought  under 
his  control  lines  usually  considered  as  having  no  affinity. 

Initiative  of  this  sort,  based  on  searching  analysis, 
is  responsible  for  the  intensive  distribution  of  to-day 
which  has  multiplied  supply  sources  in  an  effort  to  turn 
highly  developed  specialties  into  convenience  goods. 
Putting  dollar  watches  into  hardware  stores  to  reach 
classes  of  prospects  who  never  enter  a  jeweler's  illus- 
trates this  tendency.  Pickles,  preserves,  and  marma- 
lades are  now  displayed  in  the  long  unused  windows  of 
butcher  shops.  Household  remedies  and  disinfectants 
can  be  had  in  many  groceries.  "Side  lines"  of  special- 
ties for  the  use  of  men  are  found  in  cigar  stores,  pool 
rooms,  and  other  places  where  they  resort.  The  corner 
drug  store  becomes  a  neighborhood  trading  center  be- 
cause it  is  open  evenings,  Sundays,  and  holidays,  has 
made  convenience  goods  of  a  multitude  of  commodities 
which  appear  also  in  the  stocks  of  its  hardware,  dry 
goods,  candy,  stationery,  jewelry,  and  haberdashery 
neighbors. 

Up  and  down  and  across,  the  whole  fabric  of  distri- 
bution has  been  searched  for  points  of  approach  to 
groups  of  prospects  inaccessible  by  traditional  methods 
and  for  new  and  more  effective  contacts  with  prospects 

391 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

still  unsold.  Demand  creation  is  transformed  into  a 
problem  of  physical  supply.  The  problem  of  offering 
the  commodity  to  the  consumers  at  the  time  and  in  the 
place  where  it  is  needed  or  is  able  to  suggest  its  need 
influences  all  the  prior  activities  of  the  business.  The 
safety  razor,  for  example,  becomes  a  gold-plated  birth- 
day or  Christmas  gift  and  thus  breaks  into  the  jewelry 
store  where  such  gifts  are  bought. 


392 


PART  III 

THE  PROBLEMS  OF  ADMINISTRATION 


CHAPTER  XVIII 
PLANT  AND  OPERATION  POLICIES 

GOING  back  to  our  fundamental  classification  of 
business  activities,  it  will  be  recalled  that  these 
activities  divide  into  three  main  groups  according  to 
their  purposes.  In  production  the  object  is  to  change  the 
form  of  the  materials,  in  distribution  to  change  their 
place,  and  in  administration  to  facilitate  these  other 
changes.  Despite  the  sharp  cleavage  of  functions,  it  is 
only  in  exceptional  cases  that  a  clean-cut  division  of 
activities  into  three  coordinate  groups  is  found  in 
actual  practice. 

The  "general"  departments  which  concern  them- 
selves severally  with  finance,  purchasing,  employment, 
credits,  collections,  accounting  and  auditing  are  fre- 
quently recognized  as  a  separate  administrative  group. 
Seldom,  however,  is  it  realized  that  their  distinctive 
function  of  facilitating  operations  demands  unit  hand- 
ling under  a  common  executive,  with  authority  corre- 
sponding to  that  of  the  factory  superintendent  and 
sales  manager  in  their  respective  fields.  Instead,  the 
departments  report  individually  to  the  head  of  the  busi- 
ness; more  often  than  not  the  work  of  one  or  more  of 
them  is  under  his  immediate  supervision. 

This  retention  of  control  is  a  survival  from  the  time 
when  small-scale  production  allowed  the  manager  to 
guide  all  the  operations  of  his  business.   The  man  who 

295 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

owns  and  runs  a  neighborhood  saw  mill,  for  example, 
performs  all  important  functions  himself,  except  perhaps 
actual  direction  of  the  sawing.  He  buys  and  measures 
his  logs  himself  or  takes  orders  for  sawing  on  commis- 
sion. Daily  he  indicates  what  timber  is  to  be  con- 
verted into  lumber  and  what  sizes  are  to  be  produced. 
He  "waits"  on  customers  and  receives  their  cash  in 
payment  or  agrees  to  give  them  credit  until  they  market 
their  wheat  or  corn  or  hay.  He  makes  a  memoran- 
dum of  the  sale,  carries  a  ledger  account  with  the  pur- 
chaser, and  either  sends  him  statements  until  the  bill 
is  paid  or  goes  out  collecting  when  he  needs  funds  to 
meet  his  pay  roll  or  some  other  necessity.  He  "hires 
and  fires"  helpers  as  occasion  may  demand.  He  secures 
personal  loans  from  the  bank  to  tide  over  his  busy  sea- 
son or  makes  shift  to  worry  through  on  his  own  capital. 
If  he  has  a  problem  in  office  management,  it  is  only  to 
decide  whether  or  not  he  needs  a  girl  to  answer  the 
telephone  and  keep  his  few  accounts. 

As  a  business  develops  from  this  simple  type,  the 
problems  of  administration,  of  facilitating  and  keeping 
control  of  all  important  operations,  grow  in  number  and 
significance.  Because  head  sawyers  and  mill  foremen 
are  relatively  easy  to  find,  the  lumberman  whose  busi- 
ness is  expanding  surrenders  first  his  supervision  of 
manufacturing  activities.  Next,  if  the  growth  con- 
tinues, he  finds  himself  so  occupied  with  buying,  financ- 
ing, credits,  and  the  like  that  he  turns  the  marketing 
over  to  a  sales  manager.  But  even  when  his  undertak- 
ing has  grown  to  the  point  where  individual  executives 
look  after  most  of  the  administrative  functions,  the 
owner  will  probably  continue  personal  buying  of  stump- 
age  and  financing  of  new  operations  without  consider- 

296 


PLANT  AND  OPERATION  POLICIES 

ing  how  concentration  on  these  activities  forces  him  to 
neglect  others  equally  essential. 

In  a  word,  as  the  division  of  labor  is  carried  further 
and  further  in  the  activities  of  production  and  of  distri- 
bution, the  control  of  operations  becomes  increasingly 
complex.  The  pieces  on  the  chessboard  of  business 
are  multiplied  and  the  final  result  depends  more  and 
more  on  the  way  in  which  each  piece  is  manipulated  to 
further  the  general  plan.  The  necessity  of  coordinating 
and  supervising  the  countless  resulting  details  compels 
the  management  to  deal  with  paper  representations  of 
the  materials,  motions,  and  relations  involved  instead 
of  directly  with  the  things  themselves. 

The  possibility  of  thus  keeping  in  touch  with  the  sig- 
nificant activities  of  a  business  has  the  further  effect  of 
enlarging  organizations  and  the  scale  of  operations.  And 
finally,  the  scope  and  complex  character  of  business  and 
the  distance  of  the  controlling  executives  from  the  things 
controlled  put  such  a  premium  on  efficiency  in  all  these 
facilitating  activities,  that  the  principle  of  the  division 
of  labor  is  extended  and  the  classification  and  organiza- 
tion of  functions  follow  as  a  matter  of  course. 

The  introduction  of  machinery  for  compiling  and  as- 
sorting statistics,  for  wTiting  reports,  tabulating  infor- 
mation, and  checking  mental  calculations  indicates  how 
great  is  this  increase  in  administrative  activities.  The 
need,  therefore,  is  imperative  for  an  organized  method 
of  bringing  them  all  together,  of  establishing  their  rela- 
tions, and  of  holding  them  at  such  distance  from  the 
executive  that  no  one  of  them  will  exercise  undue  influ- 
ence on  his  decisions  —  in  short,  a  method  of  keeping 
them  in  balance  with  all  the  other  activities  of  the 
business. 

297 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

The  tardy  discovery  of  a  common  purpose  in  their 
functions  is  probably  due  to  belated  analysis.  It  is  only 
within  the  last  twenty  years,  indeed,  that  they  have 
begun  to  take  on  real  importance  and  acquire  a  sepa- 
rate entity.  In  the  small  or  medium-sized  business  the 
usual  practice  is  to  associate  some  of  them  with  the  fac- 
tory or  sales  organization  and  to  retain  others  under  the 
eye  of  the  executive.  Only  the  larger  concerns,  facing 
the  urgent  problem  of  keeping  them  all  effective  and  un- 
der control,  have  set  them  apart  as  a  group  of  auxiliary 
functions  directly  related  with  but  impossible  to  clas- 
sify as  activities  of  either  production  or  distribution. 
The  Taylor  system  puts  extraordinary  emphasis  on 
facilitating  activities,  particularly  those  which  directly 
affect  production.  In  the  average  factory,  however,  a 
sharp  line  is  drawn  between  "productive"  and  "non- 
productive" labor  and  effort  is  made  to  keep  the  latter 
at  a  minimum. 

Confronted  with  this  multiplicity  of  motions  and 
operations,  the  manager,  as  well  as  the  student  of  busi- 
ness, finds  that  some  scheme  of  classification  is  necessary 
to  make  their  relations  clear.  When  we  inquire  their 
purpose,  their  common  character  as  the  facilitating  ac- 
tivities of  business  comes  out  immediately.  Pursuing 
the  analysis  along  the  lines  already  made  familiar,  we 
find  that  they  break  up  into  two  groups  concerned  with 
plant  and  operating  functions.  As  before,  the  first 
group  subdivides  according  as  the  functions  relate  to 
location,  construction,  or  equipment  of  what  might  be 
called  the  "oflSce  plant." 

Adopting  again  the  method  of  approach  used  in  ana- 
lyzing the  activities  of  production  and  distribution,  the 
manager  finds  that  many  of  the  policies  governing  this 

298 


PLANT  AND  OPERATION  POLICIES 

first  group  of  activities  were  solved  when  the  corre- 
sponding policies  for  the  factory  and  sales  units  were 
determined,  because  the  mutual  relations  of  adminis- 
tration and  the  other  two  groups  are  even  closer  than 
those  between  production  and  distribution.  In  plant 
location,  for  instance,  we  saw  in  an  earlier  chapter  that 
nearness  to  sources  of  materials  and  supplies  was  a  posi- 
tive requisite  in  a  great  many  industries.  Automati- 
cally, then,  the  location  of  the  purchasing  department 
would  be  fixed  by  the  same  considerations.  In  no  other 
way  can  such  effective  coordination  between  manufac- 
turing and  purchasing  policies  be  secured  as  when  the 
production  heads  and  the  buyer  are  in  daily  and  friendly 
contact. 

Even  when  the  important  markets  for  materials  are 
distant,  the  sales  departments  of  the  supply  concerns 
are  alert  to  anticipate  the  wants  of  customers  and  pros- 
pects and  to  keep  them  informed  of  all  changes  in  prices 
and  conditions.  The  isolated  purchasing  agent,  it  is 
true,  misses  his  full  share  of  the  occasional  bargains  in 
staples  which  the  emergency  needs  of  supply  houses  pro- 
vide for  the  man  at  the  central  market.  He  loses  also 
the  benefit  of  contact  and  exchange  of  ideas  with  other 
buyers  both  in  trade  gatherings  and  in  the  functional 
associations  which  are  doing  so  much  to  standardize 
everyday  practice. 

By  proper  organization,  however,  he  can  unload  the 
purchase  of  all  but  his  most  important  lines  on  assist- 
ants and  hold  himself  free  for  buying  trips  to  the  sources 
of  these  latter  before  he  makes  his  seasonal  or  annual 
contracts.  Meanwhile  his  presence  at  the  factory  allows 
him  to  draw  on  the  counsel  and  information  of  the  en- 
tire organization,  from  the  manager's  newest  interpre- 

299 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

tation  of  a  general  buying  policy  to  the  gossip  picked  up 
by  some  department  head  whose  knowledge  of  the  mar- 
ket is  too  slight  for  him  to  give  it  relevance  and  value. 

But  the  purpose  of  this  chapter  is  no  more  than  to 
analyze  broadly  the  activities  of  administration  and 
illustrate  the  manner  in  which  the  suggested  approach 
can  be  applied  to  their  solution.  It  is  enough  therefore 
to  point  out  that  the  essential  factors  in  facilitation  — 
speed,  accuracy,  and  minimum  expense  —  are  at  their 
best  when  the  administrative  departments  are  physi- 
cally near  to  the  making  or  selling  departments  which 
they  check  and  serve.  Ability  to  have  orders  approved 
by  the  credit  department  with  the  least  possible  delay 
is  an  important  aid  to  the  sales  force.  Collection  poli- 
cies are  likewise  inseparable  from  future  sales  and  from 
the  present  finances  of  the  business.  Employment  ac- 
tivities must  be  responsive  to  the  daily,  almost  hourly, 
requirements  of  both  factory  and  sales  divisions.  Ac- 
counting, auditing,  and  statistical  departments  by  the 
character  of  their  functions,  must  keep  close  on  the 
track  of  all  the  other  units  in  the  three  major  divi- 
sions. In  all  these  cases  distance  and  elapsed  time  re- 
duce efficiency  and  increase  costs.  Finance  is  the  single 
exception  to  the  rule  of  advantageous  nearness,  and 
this  only  when  the  amounts  involved  are  too  large  to 
be  handled  safely  and  legally  by  any  but  metropolitan 
bankers  or  commercial-paper  houses. 

Sound  business  policy  envisages  many  compromises, 
however.  WTien  conditions  prescribe  a  separation  of 
the  manufacturing  and  marketing  units,  a  corresponding 
grouping  of  the  administrative  departments  according 
to  the  special  affinity  of  each  may  be  necessary,  or 
frank  division  of  each  into  local  organizations  for  pur- 

SOO 


PLANT  AND  OPERATION  POLICIES 

chasing,  employment,  and  those  recording  functions 
common  to  both  production  and  distribution  activities. 
Where  branch  houses  are  maintained,  this  division  is 
carried  even  further,  though  the  "home  office"  usually 
retains  control  over  the  district  organization. 

Construction  and  equipment  policies  in  administra- 
tion may  be  dismissed  with  a  line.  In  the  main,  they 
parallel  those  of  distribution  so  closely  that  there  is  no 
need  of  repeating  that  analysis  here. 

When  we  turn  to  the  operating  activities  of  adminis- 
tration, we  see  that  they  also  split  up  in  the  accustomed 
way  and  range  themselves  under  materials,  labor,  and 
organization.  But  there  is  this  important  difference: 
the  materials  of  administration  or  facilitation  —  that 
to  which  motion  is  applied  —  are  the  paper  represen- 
tations of  the  functions  which  are  performed.  These 
paper  representations  are  either  causal  (purchase  or 
employment  requisitions  or  shipping  requisitions)  or 
resultant  (outgoing  invoices,  vouchers,  and  general  and 
department  records) . 

How  this  classification  squares  itself  with  current 
business  practice  may  be  easily  tested.  Purchase  requi- 
sitions refer  to  plant  and  equipment  or  to  materials  and 
supplies,  while  employment  requisitions  have  to  do 
with  labor.  They  originate  in  either  the  manufactur- 
ing, the  distributing,  or  the  facilitating  activities  of  the 
business.  The  first  group  of  functions  centers  in  the 
purchasing  agent,  and  labor  brings  us  back  to  the  em- 
ployment bureau  or  to  the  officials  who  do  the  hiring 
for  the  production,  sales,  and  office  divisions.  Besides 
the  factory  or  finished  stock  departments  which  supply 
the  products  required  to  fill  customers'  orders,  the  ship- 
ping requisitions  directly  involve  the  credit  man,  who 

801 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

must  approve  the  order  before  it  is  filled.  On  the  re- 
sultant side,  the  outgoing  invoices  are  the  affair  of  the 
credit  and  collections  departments.  The  vouchers  rep- 
resent the  responsibilities  of  the  financial  end  of  the 
business,  while  the  accounting,  auditing,  and  statistical 
departments  occupy  themselves  with  the  house  records. 
fi  These  various  departments,  or  the  executives  and 
employees  who  perform  the  facilitating  functions  with 
which  each  is  charged,  are  the  agencies  of  administra- 
tion. They  correspond  to  labor  in  production,  and  to 
middlemen,  direct  salesmen,  and  advertising  in  demand 
creation.  In  considering  their  activities,  the  manager 
finds  himself  engaged  with  three  different  sets  of 
problems. 

The  first  group  has  to  do  with  the  broad  policies  in- 
volved in  determining  the  "what"  and  "how"  of  facili- 
tation. These  are  his  affair,  since  he  alone  is  able  to 
decide  what  shall  be  the  relations  between  the  admin- 
istrative department  and  the  two  other  great  divisions 
of  the  business.  Nor  can  anyone  else  establish  the 
proper  balance  between  the  speed,  accuracy,  and  cost  of 
the  facilitation  service.  The  object,  of  course,  is  to 
coordinate  the  work  of  each  department  with  all  the 
remaining  activities  of  the  business  and  to  direct  its 
internal  activities  only  so  far  as  is  necessary  to  effect 
this  coordination. 

These  internal  departmental  activities  constitute  the 
second  group  of  administrative  problems.  They  are 
detail  in  character  and  grow  out  of  the  need  of  express- 
ing the  manager's  broad  policies  in  the  facilitating 
functions  performed  by  each  department  and  in  its 
external  contacts  with  all  other  departments.  They 
are  of  lesser  import  to  the  manager  for  the  reason  that  a 

30^ 


PLANT  AND  OPERATION  POLICIES 

competent  department  head  usually  assumes  all  respon- 
sibility for  them.  Once  the  main  policies  to  be  observed 
are  laid  down,  he  will  be  able,  as  a  rule,  to  accommodate 
his  internal  policies  to  the  same  purposes. 

The  third  class  of  problems  is  concerned  with  organi- 
zation of  the  mechanics  of  administrative  effort,  with 
the  smooth  and  effective  working  of  the  routine  by 
which  the  general  policies  of  the  manager  and  the  detail 
policies  of  the  department  heads  are  carried  out.  Per- 
haps because  so  many  of  the  operations  involved  are 
the  same  or  nearly  the  same  in  all  the  departments,  the 
value  of  organization  and  standardization,  with  a 
common  executive  to  look  after  the  routine,  has  been 
generally  recognized  and  an  office  manager  given 
supervision  over  all  but  the  special  facilitating  func- 
tion of  each  department.  This  not  only  secures  effi- 
ciency of  operation,  but  also  relieves  the  manager  of  the 
burden  of  settling  minor  disputes  between  executives 
reporting  directly  to  him. 

The  manager's  chief  problem,  of  course,  is  to  reconcile 
the  frequently  conflicting  purposes  of  the  administrative 
departments  and  of  his  factory  and  sales  divisions.  This 
is  a  task  closely  paralleling  that  of  maintaining  a  uni- 
form standard  of  cost,  quality,  and  service  in  the 
activities  of  production  and  distribution  when  opposi- 
tion of  interests  occurs. 

By  way  of  illustration,  the  purchasing  agent,  to  whom 
price  is  a  primary  consideration,  may  insist  on  substi- 
tuting for  some  specified  material,  tool,  or  supply  requi- 
sitioned by  the  factory  another  which  the  state  of  the 
market  allows  him  to  buy  at  a  bargain.  Here  either 
executive  may  be  right.  The  cheaper  material  may  not 
be  fit  for  the  use  to  which  it  will  be  subjected  or  the  proc- 

303 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

esses  which  it  must  undergo  in  manufacture,  yet  the 
production  head  may  not  be  capable  of  demonstrating 
this  fact  to  the  buyer.  On  the  other  hand,  the  latter, 
through  wider  acquaintance  with  market  resources,  is 
often  able  to  provide  a  better  machine  or  material  at 
the  same  price  or  one  of  equal  quality  at  a  lower  price, 
but  cannot  persuade  the  factory  executive  to  accept  his 
judgment. 

Both  are  specialists,  concentrating  on  their  charac- 
teristic functions,  and  with  the  specialist's  inclination 
to  see  the  transaction  from  no  other  viewpoint  than  his 
own.  Friction  naturally  ensues  unless  the  manager 
steps  in  and  fixes  a  policy  that  overlooks  no  buying  ad- 
vantages which  can  be  conserved  without  sacrificing 
factory  eflBciency  or  quality  in  the  product.  The  recur- 
rence of  such  situations  and  the  consequent  necessity  of 
interpreting  the  same  basic  policies  in  terms  of  each 
fresh  dispute  constitute  strong  reasons  for  the  organi- 
zation of  the  facilitating  departments  into  a  separate 
division  under  its  own  executive,  with  authority  co- 
equal with  that  of  the  sales  manager  and  the  factory 
head. 

This,  of  course,  is  one  solution  of  the  manager's  prob- 
lem of  organization,  of  keeping  control  of  the  operations 
of  administration  without  undertaking  a  load  of  detail 
or  abandoning  his  strategic  position  apart.  Though  the 
general  problem  parallels  that  of  organization  in  distri- 
bution, the  nature  of  the  primary  departmental  func- 
tions makes  the  matter  of  control  more  complicated. 
In  distribution — and  in  production,  too,  for  that  matter 
—  each  activity  leads  up  to  the  next  in  order,  and  all 
focus  on  the  final  transfer  of  the  goods  to  the  consumer. 
In  administration  each  department  is  an  independent 

304 


PLANT  AND  OPERATION  POLICIES 

unit  dealing  direct,  so  far  as  its  main  function  goes, 
with  the  making  or  selling  group. 

Within  the  department  the  technique  of  this  func- 
tion is  generally  well  understood.  It  remains  for  the 
manager  to  define  the  policies  which  shall  govern  its 
application,  to  determine  how  the  department  shall 
divide  or  concentrate  its  operation,  and  to  lay  down 
rules  which  will  insure  cooperation  with  all  the  other 
units  of  the  organization. 

The  character  and  scale  of  the  business  help  to  define 
the  scope  and  function  of  each  department.  As  the 
organization  increases  in  size,  these  activities  take  on 
added  importance  both  because  of  the  volume  involved 
and  because  there  is  less  of  personal  contact  between  de- 
partment heads.  Hence  it  is  that  many  concerns  have 
taken  the  initial  step  toward  the  ideal  here  suggested 
and  have  transferred  the  departments  handling  them 
from  production  or  distribution  to  an  administration 
division. 

Nothing  more  than  a  glance  at  these  functions  and 
the  policies  which  guide  them  is  possible.  The  purchas- 
ing department,  for  instance,  has  as  its  chief  responsi- 
bility to  keep  available  at  all  times  a  suflScient  supply  of 
the  materials  and  equipment  required  by  production. 
The  kind  of  materials,  the  qualities,  the  quantities  to 
be  kept  on  hand,  even  the  terms  on  which  they  may 
be  bought  are  all  dictated,  wholly  or  in  part,  by  the 
management's  policies  in  production,  distribution,  and 
finance. 

Absolute  standards  may  be  set  not  only  for  the  kind 
and  quantity  of  materials  but  for  all  classes  of  equip- 
ment and  supplies.  Or  within  the  limits  fixed  by  the 
general  policies  of  the  management  on  cost,  quality, 

305 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

and  service  to  the  customer,  the  buyer  may  exercise 
wide  discretionary  power  in  his  choice  of  materials  or 
his  substitution  of  one  machine  or  supply  for  another. 
He  may  be  a  mere  clearing  house  for  quotations  or  he 
may  be  a  powerful  factor  in  production  costs. 

Sometimes  this  depends  on  the  latitude  allowed  by  the 
manager,  but  oftener  on  the  buyer's  own  departmental 
policies,  on  the  adequacy  or  inadequacy  of  his  records, 
on  his  knowledge  of  market  shifts  and  of  the  basic  con- 
ditions behind  them,  on  his  acquaintance  with  technical 
processes,  his  progressiveness  in  adapting  new  materials 
to  the  uses  of  his  plant,  his  information  about  the  indi- 
vidual situations  of  his  suppliers,  his  ability  to  keep  his 
stocks  in  balance  and  to  secure  the  low  market  price 
without  overbuying.  The  human  factor  also  counts. 
His  attitude  toward  salesmen  is  reflected  in  their  formal 
dealings  with  him  or  in  "good  buys"  and  friendly 
"leads"  on  sources  in  non-competing  lines.  His  tact 
and  skill  is  shown  in  reconciling  the  standards  fixed  by 
"the  front  oflBce"  with  the  demands  of  department 
heads.  All  these  are  matters  of  internal,  departmental 
policy,  it  is  true,  but  none  the  less  they  are  expressions 
of  the  wise  manager's  buying  policies. 

So,  also,  with  the  employment  head.  Like  the  pur- 
chasing agent,  his  first  function  is  supply,  to  establish 
and  maintain  touch  with  sources  from  which  he  can 
draw  all  the  various  classes  of  labor  required  by  the 
production,  sales,  and  administrative  divisions,  in  both 
executive  and  in  clerical  or  workman  types.  Besides 
this  initial  contact,  he  has  in  many  organizations  a  con- 
tinuous contact  with  such  of  the  rank  and  file  as  are 
susceptible  of  development  through  training  courses  and 
through  shifting  to  more  responsible  positions  as  their 

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PLANT  AND  OPERATION  POLICIES 

capacities  increase.  In  the  average  organization,  he 
surrenders  the  function  of  development  to  the  depart- 
ment executives,  retaining  only  authority  to  transfer 
men  who  are  obviously  misplaced  and  to  find  other 
positions  for  men  with  whom  departments  are  dis- 
satisfied. 

It  is  not  within  his  province  to  designate  how  men 
shall  be  managed  or  made  more  eflScient  or  paid.  These 
are  policies  which  the  manager  of  the  business  deter- 
mines, as  a  rule,  in  direct  consultation  with  the  produc- 
tion, distribution,  and  administration  executives.  It 
is  the  practice  in  a  great  many  organizations,  however, 
to  give  the  employment  head  a  degree  of  negative  con- 
trol over  these  relations  between  bosses  and  men.  No 
workman,  for  instance,  can  be  discharged  without  a 
review  of  the  case  and  the  reasons  for  his  discharge  by 
the  employment  head.  If  injustice  has  been  done  him, 
the  fault  is  remedied,  whether  the  routine  or  the  indi- 
vidual boss  was  to  blame.  Labor  "turnover"  is  rec- 
ognized as  having  a  significant  relation  to  production 
eflSciency;  one  of  the  functions  of  the  employment  de- 
partment is  to  hold  it  down  and  make  the  most  of 
available  labor  by  transfers  and  "lay-offs"  instead  of 
dismissals  for  extra  hands. 

As  to  the  qualifications  of  the  men  to  be  hired,  the 
manager  may  well  set  up  standards  to  be  observed, 
physical,  mental,  and  moral.  Quality  men  make  for  qual- 
ity products  and  satisfactory  relations  with  customers. 
Here,  again,  the  character  of  the  business  and  the  kind 
of  work  to  be  done  are  imperative  factors  in  the  choice. 
Above  all,  the  wise  manager  will  insist  that  the  men  to 
be  hired  must  harmonize  with  the  prevailing  type  al- 
ready in  the  business;  otherwise,  friction  is  sure  to  arise. 

307 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

Many  organizations,  indeed,  make  it  a  rule  to  fill  all 
positions  of  even  minor  responsibility  by  promotion  from 
within,  sacrificing  the  occasional  advantage  to  be  had 
by  hiring  competent  executives  or  specialists  from  out- 
side in  order  to  secure  harmony  in  operation,  observance 
of  house  policies,  and  the  incentive  to  self-development 
which  a  policy  of  promotion  always  supplies.  It  is  in- 
teresting to  note,  also,  that  in  a  business  where  every- 
body is  congenial  and  intensely  interested  in  his  work, 
the  outside  man  of  different  character  or  standards  who 
will  not  fall  into  line  and  adopt  the  organization  spirit 
is  in  many  cases  indirectly  "fired"  by  the  other  em- 
ployees. 

It  is  difficult,  in  considering  the  various  agencies  of 
administration,  to  indicate  even  the  outstanding  prob- 
lems and  policies,  without  exceeding  the  bounds  set 
for  a  single  chapter  in  the  book.  The  functions  of  the 
credit  department,  in  fact,  alone  would  furnish  mate- 
rial for  a  chapter,  so  many  and  intimate  are  its  rela- 
tions with  the  activities  of  distribution  and  so  important 
its  influence  on  finance.  It  is  the  primary  office  of  the 
credit  man  not  only  to  keep  selling  safe,  but  to  hold  the 
number  of  rejected  accounts  at  a  minimum  consistent 
with  an  average  loss  from  bad  debts  agreed  upon  with 
the  management  as  a  standard  allowance.  His  function 
is,  indeed,  not  negative,  but  positive  and  causal,  since 
favorable  action  in  every  possible  case  is  the  aim  and 
favorable  action  results  in  the  exchange  of  goods  in  the 
finished  stock  room  for  the  customer's  promise  to  pay. 
This  promise  becomes  an  asset  in  the  business,  its  value 
depending,  first,  on  the  customer's  ability  to  pay,  and 
second,  on  the  customer's  willingness  to  pay  promptly 
when  the  obligation  falls  due. 

308 


PLANT  AND  OPERATION  POLICIES 

Now  the  same  customer's  ability  to  pay  and  willing- 
ness to  pay  promptly  may  vary  widely  on  different  credit 
bases.  Here  the  general  policy  of  the  manager  comes 
in  as  a  defining  element.  This  may  be  one  of  great  lib- 
erality, with  terms  and  payments  so  arranged  that  the 
chief  concern  of  the  credit  man  is  with  the  honesty 
and  business  ability  of  the  buyer  rather  than  with  his 
immediate  assets.  On  the  other  hand,  caution  and 
exact  adherence  to  trade  usages  may  be  the  rule.  Be- 
tween these  extremes,  any  one  of  many  combinations  of 
strict  dealing  and  consideration  for  the  customer  may  be 
required  by  the  nature  of  the  product,  the  character  of 
customers,  general  or  seasonal  market  conditions,  and 
the  internal  situation  of  the  business  itself. 

To  make  the  first  policy  practicable,  for  instance, 
ample  working  capital,  a  wide  margin  of  profit,  a 
strongly  competitive  selling  situation,  a  limited  number 
of  prospects,  and  salability  or  earning  power  on  the 
part  of  the  product  might  all  be  necessary.  A  steam 
shovel  or  motor  truck  might  be  sold  to  a  young  contrac- 
tor on  terms  which  would  allow  earnings  to  take  care 
of  all  payments  after  the  initial  deposit,  if  the  buyer's 
character  were  above  question  and  his  record  indicated 
experience  in  excavation  or  transportation  work.  The 
product  in  this  case  would  not  be  consumed  and  might 
be  reclaimed  on  default  of  payments.  An  inflexible 
credit  policy  might  be  required  when  the  profit  margin  is 
small,  the  unit  price  low,  a  great  number  of  customers 
involved  and  capital  none  too  abundant;  or,  again, 
when  consumer  advertising  has  created  such  demand 
for  the  product  that  dealer-customers  have  little 
choice  but  to  stock  it  and  pay  for  it  on  the  manufac- 
turer's terms. 

309 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

Departmental  policies  likewise  reflect  the  ideals  or 
decisions  of  the  manager.  A  friendly  attitude  toward 
customers  and  prospects,  for  instance,  tact  in  making 
inquiries,  in  explaining  the  conditions  on  which  credit 
can  be  granted  or  the  reasons  why  it  must  be  refused,  or 
advice  to  buyers  on  the  conduct  of  their  businesses  and 
the  elimination  of  practices  and  risks  which  limit  their 
buying  power.  Again,  speed  in  passing  on  orders  to 
expedite  service  and  aid  the  sales  department,  mainte- 
nance of  competent  records  and  use  of  every  available 
source  of  information  to  determine  the  exact  status  of 
each  proffered  account,  including,  perhaps,  interchange 
of  ledger  records  with  other  firms,  either  direct  or 
through  trade  or  local  associations.  And,  finally,  co- 
ordination of  credit  policies  with  those  of  the  sales  de- 
partment, to  the  end  that  no  order  shall  be  refused  when 
a  plan  can  be  devised  for  making  its  acceptance  safe, 
and  no  prospect  or  salesman  shall  be  antagonized 
through  his  failure  to  understand  the  reason  for  the 
refusal  of  an  order  when  such  a  course  is  necessary. 

Between  credits  and  collections  the  relations  are  so 
close  and  the  interdependence  so  absolute  that  both 
functions  are  usually  handled  by  a  single  department 
until  the  volume  of  transactions  makes  their  separation 
advisable.  When  a  credit  account  passes  maturity,  it 
becomes  a  collection;  but  the  policies  which  direct  its 
subsequent  handling  are  much  the  same  as  in  credits. 
There  is,  however,  this  important  difference:  consid- 
eration for  the  past-due  customer  stops  short  of  that 
shown  the  prospect  seeking  credit.  In  the  latter  case 
only  potential  profits,  balanced  by  an  element  of  risk, 
are  involved;  in  the  former,  the  assets  of  the  seller  are 
directly  at  stake  and  his  right  to  recover  them  is  recog- 

310 


PLANT  AND  OPERATION  POLICIES 

nized  as  paramount  even  by  the  debtor.  The  process  of 
"gentling"  ceases,  therefore,  as  soon  as  it  becomes  evi- 
dent that  some  unexpected  cause,  like  a  crop  failure,  an 
industrial  disturbance,  or  some  personal  misfortune  is 
not  to  blame  for  the  dehnquency.  Recourse  is  had  to 
sterner  methods,  ending  with  an  appeal  to  the  law,  if  the 
amount  involved  is  large  enough  and  the  debtor  is  pos- 
sessed of  assets  suflScient  to  satisfy  the  expected  judg- 
ment and  costs. 

The  handling  of  past-due  accounts,  indeed,  puts  for- 
ward problems  as  difficult  and  important  as  the  grant- 
ing of  credits.  To  help  the  debtor  to  pay,  rather  than 
to  exact  his  pound  of  flesh,  is  the  policy  of  the  forward- 
looking  manager.  At  no  stage  of  the  negotiations,  short 
of  the  appeal  to  the  courts,  does  he  leave  action  to  the 
discretion  of  any  outside  agency;  or,  indeed,  entirely 
to  the  decision  of  his  own  collections  head. 

Of  all  the  activities  of  administration,  control  of 
finance  is  the  last  which  the  average  manager  surrenders. 
The  money  end  of  the  business  has  long  been  recognized 
as  his  peculiar  province,  and  it  is  only  in  very  advanced 
organizations  that  he  has  the  courage  and  wisdom  to 
put  it  in  its  proper  departmental  place.  His  policies,  of 
course,  must  guide  the  treasurer  or  whatever  official  as- 
sumes the  function  of  providing  and  protecting  the 
necessary  capital  at  the  lowest  possible  cost  and  the 
corollary  function  of  maintaining  the  right  balance  be- 
tween too  much  capital  in  dull  periods  and  too  little 
in  rush  seasons. 

The  financial  needs  of  a  business  are  twofold:  (1) 
plant  or  fixed  capital,  which  usually  goes  into  the  laud, 
buildings,  machinery,  and  other  fixed  assets  necessary 
to  the  business;    and  (2)  operating  capital,  need  for 

311 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

which  grows  out  of  the  activities  of  other  administra- 
tive divisions,  purchasing,  employment,  and  credits. 
Fixed  capital  obviously  is  invested  money;  operating 
capital  is  usually  composed  of  invested  money,  loans 
made  from  banks  or  private  persons,  and  frequently 
also  undivided  earnings. 

After  the  first  capital  needs  of  his  business  are  satis- 
fied, the  problem  of  the  manager  is  to  establish  the  most 
efficient  balance  between  the  invested  and  borrowed 
portions  of  his  working  capital.  The  latter  must  vary 
with  the  seasonal  rise  and  fall  of  sales  and  changing  gen- 
eral conditions  which  may  require  long  credits  to  cus- 
tomers one  year  and  allow  them  to  discount  their  bills 
the  next.  It  is  recognized  as  safe  and  profitable  policy 
to  let  borrowed  capital  carry  the  peak  loads  provided 
by  the  seasonal  and  extraordinary  demands  and  to 
maintain  the  invested  portion  at  the  point  where  it  will 
take  care  of  ordinary  needs  and  permit  of  at  least  an 
annual  "cleaning  up"  of  loans.  Banks  usually  require 
this,  indeed,  except  in  the  case  of  rapidly  expanding 
undertakings  or  concerns  with  an  overwhelming  pre- 
ponderance of  security  in  the  way  of  fixed  assets  and 
raw  or  finished  stock.  Not  a  few  businesses,  with  re- 
serves large  enough  alone  to  carry  the  peak  loads,  keep 
these  invested  in  marketable  securities  as  an  emergency 
fund  and  make  short-time  loans  to  satisfy  temporary 
extra  requirements.  The  larger  the  element  of  risk 
involved,  the  higher  the  rate  of  interest  this  temporary 
capital  will  command. 

All  this  assumes,  of  course,  adequate  initial  capital  for 
the  undertaking.  It  is  not  too  much  to  say  that  four  in 
every  five  American  industries  are  launched  on  the 
basis  of  hopeful  selling  possibilities  rather  than  on  that 

312 


PLANT  AND  OPERATION  POLICIES 

of  employing  capital  seeking  an  outlet.  The  manager's 
big  financial  problem  for  many  years  is  to  secure  money 
to  meet  immediate  requirements  and  to  care  for  neces- 
sary extensions  at  the  factory  and  in  the  field. 

It  is  not  uncommon  to  find  all  the  other  activities  of 
the  business  subordinated  to  this  one  problem  of  keep- 
ing a  working  balance  in  the  treasury.  The  plant  is 
rented,  power  is  taken  from  a  service  company,  equip- 
ment and  materials  are  bought  on  terms  rather  than 
price,  castings  are  purchased  outside  to  avoid  invest- 
ment in  a  foundry,  the  economies  of  lot  production  are 
sacrificed  to  a  made-to-order  schedule,  the  products 
turned  out  are  those  which  can  be  sold  in  the  shortest 
time,  heavy  discounts  are  given  for  cash,  all  except  the 
indispensable  functions  of  distribution  and  administra- 
tion are  eliminated  or  performed  in  some  fashion  by  the 
manager  himself.  The  average  small  venture,  indeed, 
offers  a  striking  demonstration  of  the  interdependence 
of  all  the  activities  of  business  and  the  influence  of  that 
which  seems  most  remote  on  the  problem  immediately 
in  hand. 

Besides  the  function  of  securing  capital,  the  manager 
must  lay  down  broad  policies  for  the  protection  of  that 
which  he  is  using.  His  long  look  ahead  must  include 
the  future  needs  of  the  business.  Funds  must  be  pro- 
vided beforehand  to  meet  contemplated  expenditures 
for  extensions  in  production  or  sales,  else  working  capital 
will  suffer.  Insurance  must  cover  factors  of  risk  such  as 
fires,  accidents,  and  customer  failures,  in  order  to  safe- 
guard capital  and  command  the  lowest  market  rates  on 
loans. 

For  the  same  reason,  such  a  balance  must  be  main- 
tained between  liabilities  and  quick  assets  as  will  sat- 

313 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

isfy  the  banks  that  their  loans  are  safe  and  a  low  rate  of 
interest  justified.  That  other  important  element  in 
finance,  credit  with  supply  sources  of  materials,  equip- 
ment, and  service  must  also  be  protected  by  prompt 
payment  of  all  accounts,  since  the  resources  thus  made 
available  more  than  compensate  for  the  obligations  in- 
volved. The  governing  policies  of  the  manager  neces- 
sarily include  the  coordination  of  activities  in  credits, 
purchasing,  employment,  and  all  other  departments 
whose  conduct  affects  finance.  The  routine  by  which 
these  guiding  policies  are  carried  out  may  be  left  to  the 
treasurer  or  other  official  responsible  for  them. 

It  is  hardly  possible  to  speak  definitely  of  managerial 
policies  toward  the  records  of  a  business.  These  fall 
into  four  groups  each  having  a  common  function  to 
purpose.  (1)  Accounting  has  for  its  objects  the  more  or 
less  mechanical  recording  of  the  operations  of  a  business 
in  terms  of  a  common  unit  and  the  matching  of  expendi- 
tures for  motions  and  materials  with  the  results  of  those 
motions  and  materials  in  their  converted  form.  (2) 
Auditing  provides  a  system  of  checks  and  queries  on 
expenditures  to  make  sure  that  they  have  been  properly 
recorded  and  charged  to  the  department  benefiting  by 
them  and  to  guarantee  that  a  fair  equivalent  has  been 
received  for  each  dollar  paid  out,  whether  for  materials 
or  the  motions  applied  to  them.  (3)  Cost-keeping  in- 
volves a  classified  analysis  of  expenditures  for  unit  oper- 
ations and  groups  of  operations  and  a  comparison  of 
such  expenditures  with  the  returns  therefrom.  The 
form  of  this  comparison  shall  emphasize  variations  from 
the  normal  standard,  since  these  demand  the  attention 
of  the  manager.  Occasional  "sample"  analyses  may 
suffice  for  minor  processes;  daily  costs  on  the  major  or 

314 


PLANT  AND  OPERATION  POLICIES 

governing  operations  are  necessary  to  keep  the  manager 
informed  of  significant  changes.  (4)  Statistics  consider 
the  records,  cost  of  operations,  and  the  commercial  re- 
turns from  a  prophetic  rather  than  a  historical  point  of 
view.  Their  purpose  is  to  forecast  the  future  in  the  light 
of  the  past,  to  trace  the  relation  of  past  costs  to  possible 
future  costs  and  attainable  results,  and  to  fix  standards 
and  quotas  for  unit  and  grouped  operations,  expendi- 
tures, and  incomes. 

As  constructive  factors  in  administration,  all  these 
records  are  developments  of  the  last  twenty  years  or  less. 
Even  in  the  late  '90s,  it  was  the  exception  rather  than 
the  rule  to  find  a  cost-keeping  system  which  was  more 
than  a  collection  of  accurate  figures  on  materials  and 
arbitrary  guesses  at  the  value  of  the  labor  and  "over- 
head" expense  involved.  Accounting  had  hardly  been 
carried  past  the  stage  where  its  records  meant  any- 
thing but  a  stupid  history  of  purchases  and  sales,  of 
outgo  and  income.  I  recall  examining  one  set  of  pur- 
chase books  in  which  every  item  bought  for  nearly 
fifteen  years  had  been  entered  in  chronological  order: 
item,  one  Remington  typewriter;  item,  one  car  load 
of  pigs'  stomachs;  item,  one  hundred  pounds  of  Bab- 
bitt metal.  But  no  attempt  had  ever  been  made  to 
classify  purchases  or  to  bring  together  materials  or 
supplies  of  the  same  character  in  order  that  the  manage- 
ment might  know  the  relations  between  total  purchases 
of  any  kind  and  the  total  product  resulting  from  them. 

Even  to-day  it  is  common  practice  to  maintain  ac- 
counting, cost,  and  statistical  records  which  have  no 
logical  place  or  purpose  in  the  controlling  scheme  of  the 
business.  Yet  purpose  here  is  the  decisive  test,  as  it  is 
in  determining  the  value  or  worthlessness  of  any  other 

315 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

motion  or  operation  in  business.  With  such  a  test, 
"What  is  the  purpose  of  this  record?"  it  is  possible  to 
classify  and  to  coordinate  or  combine  all  useful  records 
and  to  eliminate  those  which  have  no  practical  value. 

Nine  years  ago,  when  cost  accounting  was  on  the  first 
crest  of  its  vogue,  the  president  of  a  large  mid- western 
company  reduced  his  cost  department  from  twenty-five 
to  five  men  by  proposing  this  test  of  purpose  for  every 
record  that  was  being  kept.  Instead  of  a  separate  cost 
ticket  on  each  standard  machine  made,  for  instance, 
sample  costs  were  run  on  only  one  job  in  every  fifty  to 
check  and  insure  manufacturing  efficiency,  since  no 
other  reason  existed  for  cost-keeping  in  this  particular 
case.  And  so  on  through  the  whole  top-heavy  structure, 
conceived  in  a  specialist's  enthusiasm  for  recording  every 
detail,  whether  it  was  useful  or  merely  curious. 

The  most  important  thing  in  any  system  of  records, 
then,  is  that  it  should  be  a  means,  not  an  end.  The 
purpose  being  facilitation,  no  method  or  record  should 
be  employed  which  does  not  actually  forward  the  activi- 
ties of  the  business.  The  records  should  fit  the  business, 
not  the  business  the  records.  They  should  grow  out  of 
its  operations  and  necessities  rather  than  be  superin- 
posed  from  the  top.  At  the  same  time,  it  must  be  borne 
in  mind  that  the  scope  and  functions  of  records  increase 
so  rapidly  as  a  business  expands  that  sooner  or  later  the 
point  is  reached  where  the  recording  functions  must  be 
organized  and  coordinated  if  the  manager  is  to  retain 
control  of  operations. 

The  strategic  position  for  the  manager,  as  we  have 
already  seen,  is  one  free  from  the  routine  of  any  depart- 
ment yet  in  touch  with  the  significant  details  of  all. 
From  no  other  viewpoint  can  he  secure  a  clear  vision  of 

316 


PLANT  AND  OPERATION  POLICIES 

his  business,  protect  himself  from  department  bias,  and 
overcome  a  tendency  to  lay  too  much  stress  on  the  ac- 
tivities which  are  most  familiar  or  most  interesting  to 
him.  I  do  not  mean  that  the  head  of  a  business  must 
withdraw  himself  from  contact  with  all  details  in  order 
to  keep  his  perspective.  In  innumerable  small  busi- 
nesses the  owner-manager  is  of  necessity  the  sales 
manager  or  factory  superintendent,  the  advertising 
manager  or  the  purchasing  agent,  to  say  nothing  of  his 
handling  the  finance  and  perhaps  of  credits  and  col- 
lections. 

It  is  to  just  such  a  man  that  the  classification  of  busi- 
ness activities  here  proposed  should  be  most  suggestive, 
since  it  emphasizes  as  of  equal  importance  with  the 
organization  of  production  and  distribution  the  coor- 
dination of  those  facilitating  activities  which  are  fre- 
quently administered  haphazard  because  the  conse- 
quences of  neglect  are  slower  to  appear.  In  the  large 
business  also  the  management  deals  with  details,  but 
only  with  symptomatic  details.  The  popular  concep- 
tion of  the  head  of  a  big  enterprise  is  of  a  man  engaged 
in  transactions  involving  millions  of  dollars.  Yet  in  a 
business  of  great  size  it  may  be  a  mere  matter  of  rou- 
tine to  put  a  note  for  one  hundred  thousand  dollars  in 
the  bank,  while  the  question  of  making  a  change  in  the 
product  which  would  add  or  subtract  only  a  fraction  of 
a  cent  in  cost  may  be  a  significant  detail  which  the  head 
himself  must  handle  because  it  might  aft'ect  some  func- 
tion of  the  product  or  some  equality  which  commends  it 
to  its  public.  The  big  business  man,  therefore,  is  con- 
stantly concerned  not  with  routine  trifles  but  with 
symptomatic  details. 

Acceptance  and  use  of  this  classification  does  not 

317 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

necessarily  mean  the  formal  partition  of  an  organiza- 
tion into  production,  distribution,  and  administration 
divisions,  though  such  a  plan  of  organization  in  effect 
is  successfully  employed  by  leading  American  indus- 
tries. The  purchasing  agent  may  remain  a  factory 
official;  the  experimental  department  may  continue  to 
work  under  the  sales  manager;  and  so  on.  The  impor- 
tant thing  is  that  the  manager  himself  should  recognize 
that  these  activities  are  of  interest  not  only  to  the 
factory  and  the  sales  department  but  to  the  entire 
organization. 

Viewed  thus,  their  oversight  and  direction  are  as  es- 
sentially the  manager's  concern  as  supervision  of  making 
and  selling  operations.  By  placing  them,  as  facilitat- 
ing activities  related  to  the  whole  business,  on  a  par 
with  the  activities  of  production  and  distribution,  the 
scheme  of  classification  set  forth  in  this  volume  gives 
the  manager  the  correct  focus  and  a  rational  approach 
to  the  problems  arising  from  them.  The  first  service  of 
any  good  classification,  indeed,  is  to  allow  the  man  using 
it  to  back  away  from  the  things  with  which  he  is  imme- 
diately occupied  and  to  see  all  the  activities  involved  in 
their  true  relations  and  proportions.  This  strategic  po- 
sition, aloof  from  details  (or  at  least  recognizing  them 
as  details),  leaves  him  free  to  sense  the  broader  prob- 
lems which  changing  conditions  and  increasing  social 
control  of  private  enterprises  are  proposing  for  his 
solution. 


318 


CONCLUSION 


CHAPTER  XIX 

THE  EXTERNAL  PROBLEMS  OF  BUSINESS 

TF  the  vital  relations  of  any  business  were  charted,  its 
■■•  internal  and  external  activities  might  be  represented 
as  two  circles  impinging  upon  one  another,  with  the  man- 
agement on  the  alert  at  the  point  of  contact.  The  inter- 
nal problems  would  arise  out  of  the  interrelations  of  the 
activities  of  production  and  distribution  and  of  what 
we  have  been  calling  administration,  for  lack  of  a  better 
name.  The  external  problems  would  have  to  do,  first, 
with  the  special  public  the  business  is  concerned  with, 
its  customers  and  prospective  customers,  its  direct  and 
potential  competitors,  and  the  general  body  of  labor  from 
which  it  draws  its  workers,  executives,  salesmen,  clerks, 
and  factory  operatives.  And  outside  this  circle,  another 
much  larger  might  be  traced  to  indicate  the  relations  of 
the  business  with  the  general  public.  Included  in  this 
larger  group  also  would  be  the  individuals  making  up  the 
special  public  of  the  business  and  the  members  of  its 
organization.  For  the  attitude  even  of  employees  is 
affected  by  their  social  judgment  of  the  business,  its 
methods,  and  its  aims. 

Unless  he  is  blind  or  obstinate,  the  business  man  of 
to-day  must  realize  that  he  is  no  longer  autocrat  of  a 
private  undertaking,  able  to  base  his  policies  on  personal 
whim  or  desire  or  an  entirely  selfish  conception  of  busi- 
ness. Just  as  society  is  asking  of  its  college  men  what 
return  in  community  service  they  are  making  for  the 

321 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

exceptional  training  advantages  accorded  them,  public 
opinion  is  beginning  to  put  the  same  query  to  business 
men  in  sharper  and  more  specific  fashion. 

"Here,"  society  says,  "you  have  been  given  oppor- 
tunities and  advantages  in  your  business  such  as  no 
body  of  men  at  any  other  stage  of  the  world's  progress 
ever  enjoyed.  You  have  raw  materials,  fuel,  and  sup- 
plies that  are  cheap,  abundant,  and  of  excellent  quality. 
You  have  machinery  of  surpassing  ingenuity  and  ca- 
pacity, able  to  perform  almost  any  task  you  set  for  it 
at  a  cost  amazingly  slight.  You  have  labor  of  excep- 
tional intelligence  to  direct  and  supplement  the  func- 
tions of  these  machines.  You  have  a  comprehensive 
transportation  system  which  allows  you  to  locate  where 
land  is  low  in  price  and  buildings  can  be  cheaply  con- 
structed, yet  makes  a  great  continent  available  as  a 
market  for  your  product  and  a  source  for  your  supplies 
of  labor,  materials,  and  equipment. 

"Almost  every  necessary  element  and  favorable  con- 
dition you  could  ask  are  provided  for  you.  You  have 
only  to  supply  the  organizing  ability  which  will  pick  out 
the  right  product  to  make  or  sell,  and  choose  the  right 
materials,  the  right  equipment,  the  right  location,  the 
right  method  of  marketing.  Over  against  your  organ- 
izing ability  and  capital,  I  set  these  contributions  of 
mine.  What,  besides  the  market  minimum  of  value 
and  service  at  the  price,  are  you  going  to  supply  as  my 
profit  on  my  investment  of  community  machinery  and 
opportunty.f^" 

Without  formulating  its  approach  to  the  problem,  the 
public  has  been  applying  more  and  more  inclusively  the 
basic  test  of  purpose  to  the  activities  of  business  men. 
It  has  come  to  feel  that  the  large  margin  of  profit 

322 


THE  EXTERNAL  PROBLEMS  OF  BUSINESS 

hitherto  allowed  permits  them  to  practice  many  of  the 
mere  "arts  of  commerce."  It  has  sensed  the  existence 
of  useless  motions,  observed  the  needless  duplication  of 
essential  functions,  and  in  some  cases,  as,  for  example, 
the  establishment  of  a  government  parcel  post  to  carry 
package  freight  in  competition  with  the  express  com- 
panies, it  has  sought  a  drastic  short  cut  to  a  fairer 
balance  between  service  and  cost. 

In  other  instances  it  has  adopted  milder  measures  of 
regulation  and  adjustment,  as  in  the  work  of  the  Inter- 
state Commerce  Commission,  the  Federal  Trade  Com- 
mission, the  Federal  Reserve  Board,  and  the  activities 
of  state  and  local  boards  for  the  supervision  of  trade 
and  industry.  It  is  from  this  attitude  of  society,  crys- 
talizing  after  long  agitation  into  definite  policies  of  reg- 
ulation, that  arise  what  may  be  termed  the  external 
problems  of  business.  They  are  of  growing  importance, 
of  immediate  importance,  indeed;  and  no  discussion  of 
business  policies  would  be  complete  \\athout  some  effort 
to  analyze  them  and  suggest  how  their  solution  may  be 
approached. 

In  dealing  with  both  the  general  public  and  his 
special  public,  the  manager  is  not  so  much  concerned 
with  the  immediate  activities  observed  as  with  the 
actuating  motives  which  they  express.  When  he  begins 
studying  the  public  and  its  relations  with  his  own  under- 
taking, he  finds  that  he  must  first  take  account  of  the 
motives  likely  to  influence  the  various  social  groups  or 
strata  to  action  favorable  or  unfavorable  to  his  pur- 
poses. The  comfort  his  employees  enjoy  in  pleasant, 
well-lighted,  and  well-ventilated  workrooms,  for  in- 
stance,Us  likely  to  reflect  itself  in  a  community  esteem 
which j^will  have  a  favorable  influence  on  local  sales 

323 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

and  on  the  attitude  of  that  section  of  the  public  from 
which  he  must  draw  his  workers.  A  practical  classifi- 
cation of  the  public,  then,  might  be  based,  first,  on  the 
relations  of  the  business  with  the  various  strata,  and 
next  on  the  common  motives  which  will  permit  group 
handling  and  group  control. 

All  this  has  to  do  with  the  business  as  an  individual 
enterprise,  apart  from  all  other  concerns  and  responsible 
only  for  its  own  actions.  But  the  manufacturer  or  mer- 
chant must  reckon  now  with  the  public's  changing 
attitude  toward  all  business,  toward  the  particular 
industrial  or  trade  group  to  which  his  concern  belongs, 
toward  the  special  form  of  organization  which  he  has 
adopted.  For  a  long  time  the  fullest  measure  of  com- 
petitive freedom  for  the  individual  was  the  rule,  on  the 
theory  that  society  was  best  served  when  every  man's 
initiative  was  given  full  play.  As  the  possibilities  of  or- 
ganization, coordination,  and  integration  in  the  indus- 
tries and  trades  became  clear,  the  wisdom  of  an  extreme 
laissez  faire  policy  began  to  be  questioned.  As  a  con- 
sequence, the  management  to-day  faces  a  whole  series 
of  external  problems  which  did  not  exist  until  these  new 
social  forces  were  set  in  motion. 

To  solve  the  problems,  he  must  understand  the  mo- 
tives which  control  them  and  must  be  able  to  establish 
their  specific  relations  with  his  undertaking.  The  func- 
tion of  the  classification  proposed  in  this  volume,  in- 
deed, is  not  only  to  allow  him  to  see  all  the  activities  of 
his  business  in  proper  perspective  and  to  allocate  his  in- 
ternal problems  as  they  arise,  but  also  to  enable  him  to 
value  the  external  conditions  affecting  them  and  to  ad- 
just his  internal  policies  before  the  possibility  of  recon- 
ciling them  has  passed  by. 


THE  EXTERNAL  PROBLEMS  OF  BUSINESS 

In  determining  the  policies  which  shall  govern  his 
relations  with  the  general  public,  the  business  man  will 
recognize  three  modifying  influences  —  or  three  phases 
of  the  same  powerful  influence  —  to  which  he  must 
accommodate  his  activities.  Of  these,  the  hardest  to 
understand,  yet  the  real  force  to  reckon  with,  is  public 
opinion,  the  reaction  of  contemporary  thought  or  emo- 
tion or  ethical  sense  upon  the  activities  of  business  and 
the  conditions  under  which  they  are  carried  on. 

The  law  is  the  second  influence.  But  law  is  simply 
the  crystallization  of  public  opinion  into  a  definite  enact- 
ment; while  the  government,  the  third  influence,  is  no 
more  than  an  administrative  agency  for  putting  this 
formulated  public  opinion  into  efiFect. 

The  wise  man  is  the  man  who  keeps  abreast  of  public 
opinion,  who  detects  the  changing  viewpoint  of  the 
country  or  the  community  and  so  modifies  his  individual 
business  practice  that  he  later  cooperates  with  rather 
than  opposes  the  operations  of  the  law  or  the  machinery 
of  the  government.  The  average  business  man,  how- 
ever, is  so  submerged  in  the  details  of  his  undertaking 
that  he  either  fails  to  catch  the  drift  of  public  opinion  or 
does  not  realize  its  vital  bearing  on  his  business.  Not 
until  the  law  formulating  this  public  opinion  is  enacted 
or  is  about  to  be  enacted  does  he  awake  to  its  purport. 
Then  he  discovers  that  the  people,  through  various  civic 
organizations,  have  been  studying  the  underlying  ques- 
tion much  longer  than  he  had  suspected. 

Public  opinion  is  the  fundamental  force,  yet  even  now 
business  men  are  more  intent  apparently  upon  the  in- 
terpretation of  the  law  and  the  attitude  of  the  govern- 
ment than  upon  developments  in  the  public  mind. 
Watching  all  the  legislative,  judicial,  and  administrative 

S25 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

machinery  in  motion,  the  manager  of  a  business  may 
too  readily  conclude  that  his  important  external  prob- 
lems are  concerned  chiefly  with  it,  not  with  smoking  car 
debates,  the  gossip  of  a  switch  shanty  or  the  discussion 
of  a  woman's  club.  But  it  is  this  talk  and  the  convic- 
tions which  emerge  from  it  that  are  the  things  he  must 
consider. 

The  passage  of  the  Interstate  Commerce  Act  in  1887, 
for  instance,  was  the  first  positive  break  in  a  long-con- 
tinued policy  of  federal  encouragement  of  private  enter- 
prise, particularly  evident  in  the  subsidies  and  land 
grants  to  railroads  and  the  protective  tariff  for  the  fos- 
tering of  industries.  The  Sherman  Anti-Trust  Law 
followed  in  1890,  but  a  dozen  years  were  to  elapse  before 
court  decisions,  defining  the  jurisdiction  of  the  Inter- 
state Commerce  Commission  and  the  inclusive  scope 
of  the  Sherman  law,  emphasized  the  principle  of  control 
underlying  both  enactments. 

No  better  illustration  could  be  cited  of  the  power  of 
pubhc  opinion  to  modify  the  established  law  as  inter- 
preted by  the  courts  and  administered  by  the  govern- 
ment. The  Commerce  Act  as  adopted  expressed  the 
current  feeling  that  discriminations  in  railroad  rates  for 
or  against  individual  shippers  or  communities  consti- 
tuted a  menace  to  the  business  of  the  country.  The 
Sherman  law  was  quite  as  definite  in  its  attack  on  con- 
tracts and  combinations  in  restraint  of  trade.  But 
neither  effected  any  radical  change  in  the  practices  they 
were  aimed  at  until  the  courts  and  the  national  govern- 
ment began  to  feel  the  pressure  of  a  more  thoroughly 
aroused  public  sentiment  a  full  decade  later.  Had  the 
railroads  taken  cognizance  of  this  public  opinion  and 
reshaped  their  rate  and  traffic  policies  in  accord  with  it, 

326 


THE  EXTERNAL  PROBLEMS  OF  BUSINESS 

they  might  have  been  spared  some  of  their  troubles  in 
the  last  seven  or  eight  years. 

This  pressm*e  has  continued  and  grown  stronger. 
Witness,  among  other  effects,  the  decisions  of  the  United 
States  Supreme  Court  dissolving  the  Northern  Secur- 
ities Company  and  the  oil  and  tobacco  combinations, 
canceling  the  exclusive  anthracite  coal  contracts, 
affirming  the  right  of  the  Interstate  Commerce  Com- 
mission to  fix  general  or  zone  rates  on  its  own  initiative, 
and  declaring  the  constitutionality  of  the  long  and  short- 
haul  clause  of  the  Commerce  act.  On  the  administrative 
side,  also,  there  are  the  defensive  suit  pending  against 
the  International  Harvester  Company,  which  hinges  on 
the  ability  of  that  concern  to  throttle  competition  rather 
than  on  any  actual  efforts  to  that  end,  the  inquiry  into 
the  internal  efficiency  and  policies  as  well  as  the  trade 
conduct  of  the  United  States  Steel  Corporation,  the 
successful  attacks  on  the  methods  of  discouraging  com- 
petition employed  by  the  "bathtub  trust,"  and  other 
virtual  monopolies  maintained  through  control  of  basic 
patents. 

And,  finally,  the  legislative  program  of  the  Sixty-third 
Congress  included  the  Clayton  law,  defining  unfair 
trading  practices,  and  the  act  establishing  the  Federal 
Trade  Commission,  the  latter  standing  toward  business 
in  general  in  much  the  same  relation  as  the  Interstate 
Commerce  Commission  stands  toward  the  railroads 
and  the  shippers  of  the  country.  As  this  chapter  is  writ- 
ten (November,  1915),  the  first  important  suit  to  enforce 
the  Clayton  law  has  been  begun  at  St.  Louis,  the  sales 
contracts  and  price-fixing  methods  of  the  United  Shoe 
Machinery  Company  being  under  fire  as  unlawful  prac- 
tices that  lessen  competition  and  promote  monopoly. 

327 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

This  increasing  concern  of  the  federal  and  state  gov- 
ernments with  business  practices  opens  up  a  new  vista 
of  external  problems  to  the  manager.  They  have  to  do 
with  four  general  groups  of  business  relations  now  under 
scrutiny  or  already  under  control :  (1)  the  form  and  size 
of  organizations  and  their  relations  with  other  organi- 
zations, outside  the  buying  and  selling  of  products  or 
services;  (2)  the  relations  of  a  business  with  its  em- 
ployees; (3)  its  relation  with  customers;  and  (4)  the 
responsibility  of  individual  oflBcers  for  corporation  acts. 

Under  the  first  heading  come  the  suits  for  the  disso- 
lution of  combinations  like  the  American  Tobacco, 
Standard  Oil,  and  Northern  Securities  companies,  the 
prohibition  of  interlocking  directorates  and  of  owner- 
ship through  single  stock  control  of  competing  business, 
the  forbidding  of  pooling  and  price-fixing  agreements 
between  normally  competing  concerns,  and  the  limita- 
tion of  new  security  issues  in  the  public  utilities  field 
by  the  various  state  boards  for  the  regulation  of  such 
companies. 

Government  control  of  the  relations  of  a  business  with 
its  employees  has  taken  shape  largely  in  welfare  legis- 
lation, like  the  workmen's  liability  and  compensation 
laws  now  in  force  in  a  majority  of  the  states,  in  the 
child-labor  laws,  in  the  laws  limiting  the  hours  of  labor 
for  women,  and  in  the  fire  and  sanitary  building  codes 
of  the  states  and  cities.  The  agitation  for  a  minimum 
wage  law  based  not  on  the  abihty  of  the  worker  to  pro- 
duce but  on  his  living  needs  is  evidence  of  a  radical 
trend  in  public  opinion  which  will  have  to  be  taken  into 
account.  Really  an  economic  question,  involving  the 
elimination  of  the  unfit  worker  "at  the  margin,"  it  is  so 
confused  with  human  values  that,  as  with  so  many 

328 


THE  EXTERNAL  PROBLEMS  OF  BUSINESS 

other  business  problems,  it  may  have  to  be  decided  on 
other  than  economic  grounds. 

The  pure  food  law  and  the  rate-making  provisions  of 
the  Interstate  Commerce  Act  are  typical  of  the  stat- 
utes directly  affecting  the  relations  of  a  business  with 
its  customers.  The  supervision  of  price-fixing,  which 
is  one  of  the  main  issues  involved  in  the  St.  Louis 
federal  suit  against  the  United  Shoe  Machinery  Com- 
pany, the  right  of  manufacturer  to  fix  the  resale  price 
of  his  product,  and  the  direct  regulation  of  prices  of 
products  or  services  where  the  monopoly  factor  or  a 
question  of  public  policy  enters  in,  are  all  questions 
still  in  process  of  settlement  but  offering  serious  external 
problems  for  the  consideration  of  the  business  man. 

How  far  the  last  function  may  go  is  illustrated  by 
the  recent  Oklahoma  law  empowering  the  state  Corpora- 
tion Commission  to  regulate  the  price  of  petroleum  and 
the  volume  of  its  production  within  the  state.  The  Com- 
mission is  directed  to  fix  the  actual  value  of  crude  oil 
by  comparing  the  market  prices  of  products  with  the 
cost  of  refining  plus  a  fair  profit,  to  limit  production 
whenever  the  market  price  of  crude  oil  fails  to  yield  a 
profit  on  this  basic  figure,  and  to  allot  to  each  well 
owner  his  share  of  the  current  production  allowed.  In 
a  word,  the  cooperative  action  forbidden  to  the  well 
owners  by  the  federal  anti-trust  laws  is  here  assumed 
outright  by  the  state  and  the  control  of  his  production 
and  distribution  activities  is  taken  from  the  individual 
producer.  That  the  intention  is  to  aid  him  and  pre- 
vent the  demoralization  of  an  industry  does  not  decrease 
the  significance  of  the  act. 

In  the  same  category  of  undefined  hazards  is  also  the 
final  attitude  of  the  government  and  the  law  as  to  the 

3^9 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

responsibility  of  individual  officials  for  the  acts  of  the 
corporations  which  they  control.  On  this  point  the  law 
certainly  lags  behind  public  opinion;  in  time  it  is  likely 
more  closely  to  reflect  public  sentiment. 

This  trend  toward  government  regulation  of  economic 
activities  is  a  matter  of  growing  concern  to  every  man- 
ager. In  the  past,  the  average  man  has  left  the  thresh- 
ing out  of  proposed  restrictive  legislation  or  adminis- 
trative orders  to  the  larger  commercial  and  industrial 
units,  on  the  theory  that  their  interests  in  the  matter 
were  so  great  that  they  could  be  trusted  to  represent 
his  interests  also,  or  for  the  more  specific  reason  that 
usually  he  did  not  realize  the  importance  of  the  question 
until  it  was  brought  to  his  attention  by  the  action  of 
these  larger  concerns.  In  the  future,  however,  the  atti- 
tudes of  the  national  and  state  governments  toward 
business  are  bound  to  have  an  increasing  influence  on 
the  conduct  of  every  factory  and  store. 

No  longer  can  the  head  of  a  small  business  leave  the 
adjustment  of  his  relations  with  the  law,  the  govern- 
ment, and  public  opinion  to  the  grace  of  his  big  neigh- 
bors or  competitors  or  the  zeal  of  the  men  who  run 
his  trade  association.  He  must  cooperate  with  his  trade 
rivals  and  associates  in  conveying  to  the  public  in  gen- 
eral and  to  the  men  who  make  and  execute  the  laws  an 
understanding  of  the  activities,  the  relations,  and  the 
necessities  of  business.  Otherwise  ill-conceived  or  doc- 
trinaire legislation  will  hamper  the  operations  of  trade 
and  industry  to  such  a  degree  that  the  burden  of  added 
expense,  under  the  law  of  competitive  business,  will 
have  to  be  passed  along  to  the  consumer. 

Regulation  must  be  intelligent;  it  must  be  at  the 
hands  of  men  who  know  the  technique  of  business,  who 

330 


THE  EXTERNAL  PROBLEMS  OF  BUSINESS 

can  distinguish  between  essential  and  non-essential 
activities,  and  can  further  the  first  while  they  are  elim- 
inating the  latter.  In  self-defense,  therefore,  as  well 
as  for  the  sake  of  progress,  every  business  man  must 
begin  to  consider  the  shaping  of  legislation  and  the 
choice  of  administrative  officials  as  external  problems 
of  his  business. 

The  slogan  "good  enough  is  the  enemy  of  the  best" 
is  written  large  upon  the  wall  of  one  great  American 
factory.  It  expresses  the  idea  that  must  be  carried, 
sooner  or  later,  into  every  activity  of  business.  Indi- 
vidual initiative  will  effect  this  standardization,  just  as 
it  has  accomplished  the  cheap  refining  of  petroleum  and 
steel.  But  society  through  its  legislative  and  admin- 
istrative machinery  could  provide  wholesale  short  cuts 
to  efficiency  by  organizing  this  questioning  of  methods, 
materials,  and  results,  by  directing  and  financing  an  un- 
ending search  for  the  useless  motion  and  extending  it 
to  all  the  operations  of  business. 

There  has  been  no  lack  of  public  inquiries,  recently 
directed  at  various  phases  of  trade  and  industry.  They 
effected  little,  however,  because  they  dealt  only  with 
phases,  as  in  the  recent  government  investigation  of 
price  maintenance,  for  instance,  and  failed  to  consider 
the  problem  in  its  broad  relations  with  other  problems. 
This  because  the  investigators  lacked  an  approach  to 
the  problems  they  were  trying  to  solve,  such  a  classi- 
fication, perhaps,  as  we  have  been  using  here  to  deter- 
mine the  relations  of  business  activities  and  to  make 
our  problems  understandable. 

We  have  seen,  too,  how  this  classification  embodied 
the  germ  of  efficiency  by  providing  a  test  which  will 
differentiate  necessary  from  useless  motions.    It  might 

331 


AN  APPROACH  TO  BUSINESS  PROBLEMS 

also  be  employed  in  the  government's  analysis  of  trade 
and  industry  as  a  whole,  in  order  to  determine  for  its 
own  use  and  for  the  individual  business  man's  use  what 
motions  are  essential  and  what  ones  may  be  spared. 
This,  I  think,  is  the  big,  undefined  purpose  behind  our 
unrelated  public  inquiries  into  business  operations. 
There  is  the  feeling  that  waste  and  useless  motions  hold 
the  cost  of  doing  business  above  the  rightful  level; 
and  investigation  after  investigation  is  launched  in 
response  to  public  pressure  to  discover  and  remove  the 
cause. 

Society,  indeed,  needs  to  know  more  about  the  activ- 
ities of  business,  to  realize  their  relations  and  interde- 
pendences. Individually  its  members  must  understand 
that  if  useless  motions  are  to  be  tracked  down  and 
eliminated  in  order  to  reduce  costs,  consumers  must 
cooperate.  Frequently  they  demand  so  much  service 
that  the  business  man,  forced  to  comply,  is  obliged  to 
increase  his  mark-up  on  delivered  cost  to  keep  his  margin 
safe.  Such  service  means  extra  motions,  extra  equip- 
ment, extra  labor.  If  a  community  or  a  class  insists  on 
this  extra  service,  it  should  understand  that  it  must  pay 
for  it. 

When  it  exercises  its  collective  function  of  law- 
making, too,  society  must  consider  lest  it  lay  on  busiuess 
a  burden  of  costly  reports,  unnecessary  building  or  labor 
restrictions,  inequitable  taxes  and  the  like  which  busi- 
ness in  turn  must  pass  back  to  its  members  in  their  roles 
of  individual  consumers.  When  a  satisfactory  level  of 
efficient  operations  is  worked  out  for  trade  and  industry, 
it  will  come  through  the  common  effort  of  business  and 
society  to  eliminate  the  countless  useless  motions  that 
exist  to-day. 

332 


THE  EXTERNAL  PROBLEMS  OF  BUSINESS 

Summed  up,  then,  the  business  man  has  two  distinct 
groups  of  problems  to  consider.  In  approaching  and 
solving  them  he  must  keep  always  in  mind  the  universal 
application  of  the  principles  of  balance  and  of  interde- 
pendence. He  must  remember  that  no  question  can  be 
dealt  with  in  the  light  of  departmental  requirements 
alone,  or  even  as  one  affecting  only  production  or  dis- 
tribution or  administration  policies.  Instead,  it  must 
be  handled  as  a  matter  involving  many,  perhaps  all,  of 
the  other  activities  of  his  business.  But  more  is  neces- 
sary. He  must  not  only  perceive  these  contacts  and 
establish  right  relations  between  activities  within  his 
organization  and  within  the  circle  of  his  special  public; 
he  must  also  accommodate  his  policies  and  his  practice 
with  the  convictions,  and  at  times  the  sentiments,  of 
the  general  public  as  finally  expressed  by  the  law  and 
the  administrative  acts  of  the  government.  In  a  word, 
the  external  problems  of  business  thus  become  internal 
problems  in  the  sense  that  no  intra-organization  policy 
can  safely  be  determined  without  taking  into  account 
the  attitude  of  society  toward  the  activities  involved. 


333 


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